04.07.2016

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Updates

Today, businesses and their executives face an increased threat given the personal liability for officers, directors, managing agents and others as discussed in our recent alert, “California’s Fair Day’s Pay Act May Impose Liability on Individuals for Wage Claims.”  Insurance can provide important protection against such threats.  Our Insurance Recovery practice shares its insights on the availability of insurance for these claims.

In this first installment, we address the rise in “wage-and-hour” class actions and other similar claims, the expansions of personal liability due to recent legislation in California and New York, and the kinds of insurance that may be available.  Future topics include whether traditional types of insurance will provide the necessary protection and how to assess new wage-and-hour insurance products.  

Wage-and-Hour Claims Continue to Rise 

The number of cases filed in federal courts alleging violations of the federal Fair Labor Standards Act (FLSA) has continued to rise over the past several years.  In the statistical year ending September 30, 2015, over 8,700 FLSA cases were filed in federal court, an increase of 7% from 2014 and up more than 27% from 2011.  State courts have also experienced high volumes of wage-and-hour cases, including claims of “wage theft” or worker “misclassification,” especially in California and New York.  Many of these actions are brought as class actions, upping the ante and increasing the desirability of buying insurance protection that addresses this new exposure appropriately. 

New Laws Expand Potential Liability

California and New York now allow for directors and officers and others (in New York, for example, the “top 10 shareholders”) to be held personally liable for violations of wage-and-hour laws.  California’s new statute, the Fair Day’s Pay Act, exposes individuals who “[act] on behalf of an employer” to personal liability for the company’s allegedly improper wage-and-hour practices.  Labor Code § 558.1 (eff. Jan. 1, 2016).  New York amended its existing Business Corporation Law § 630, effective January 19, 2016, to extend joint and several personal liability for unpaid wages to the top 10 shareholders of both privately held corporations incorporated in New York and foreign corporations, including “silent” owners.  As a result, individual executives and high-level corporate agents, and their personal assets, face increased risks from employee and contractor lawsuits seeking allegedly unpaid employee wages and benefits. 

Are Companies Covered? 

Traditional employment practices liability (EPL) and directors’ and officers’ (D&O) insurance today may not protect against the defense costs, and possibly significant liability costs, in such lawsuits.  The defense costs in wage-and-hour class actions, in particular, can be substantial. 

EPL insurance policies today regularly exclude coverage for “wage-and-hour claims” or subject such coverage to stringent (low-dollar) sublimits.  Thus, policyholders are well-advised to review proposed EPL policies to see if they include wage-and-hour exclusions or low sublimits for these new exposures. 

Unlike EPL policies, today’s D&O insurance policies do not exclude coverage for such claims as a matter of course.  However, D&O insurers are including “wage-and-hour exclusions” with increasing regularity in their policies.  As a result, policyholders concerned about such exposures should also review their current and proposed D&O policies carefully to ensure that directors, officers and other employees or shareholders are protected from the often significant defense and other costs posed by such claims. 

Recognizing these trends, insurance brokers and insurers have developed insurance products specifically addressed to these increasing wage-and-hour exposures.  Policyholders, particularly those in California and New York, should consider these newly emerging wage-and-hour specialty policies to ensure that they are adequately protected for these types of claims.

Next installment: Will traditional insurance policies protect your company against employment liabilities?    

© 2016 Perkins Coie LLP


 

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