18 July 2013Re/insurance

Clocking off - workers comp

Employment practice liability insurance has traditionally been focused upon issues such as discrimination, harassment and wrongful termination, but rising levels of litigation in the fi eld of wage and hour disputes have created another area of concern for employers. As Adeola Adele, US employment practices liability product leader at Marsh outlined, since the mid-2000s wage and hour claims have risen sharply, spurred on by early successes in litigation and—more recently—by the financial crisis, as the chart opposite shows.

The rise in claims is due to the interpretation by litigators of the Fair Labor Standards Act (FLSA) of 1938, which establishes minimum wages, overtime pay, record keeping and child labour restrictions among private sector employees. While commendable, the act has beenincreasingly used against employers by plaintiffs seeking damages for out-of-hours work. The rise has been so steep that wage and hour lawsuits filed in 2011 accounted for 84 percent of all employment class action lawsuits fi led, according to a report from Seyfarth Shaw. And it isn’t only the number of cases that is staggering. Settlements have also been significant.

As a recent Marsh report on the matter found: “The settlement value of these claims outpaced settlements of employment discrimination claims—a single wage and hour settlement in 2012 cost a pharmaceutical company $99 million.” Such claims cannot be viewed in isolation. “Sizable settlements inspire other similar cases,” said Adele, with US employers now facing a raft of costly claims.

Blame Lehmann

Greater intrusion of business into our private lives appears to be one of the major drivers of rising wage and hour claims. As Adele explained, “there is increasing pressure to work beyond the eight-hour work day”, with innovations such as mobile phones, tablets and the Internet meaning that many employees are on-call outside working hours. Among those with grievances related to such intrusion there is a temptation to turn to litigation, particularly in view of the size of some of the settlements.

"With case law now being more positive towards employers and with greater awareness, more companies now feel comfortable defending themselves in such cases."

But while changing work practices are one driver, perhaps the most significant has been the economic fall-out from the financial crisis. “While these claims existed before 2008, there was a sharp increase as a result of the recession,” said Adele. “A lot of hourly workers were laid off and people were looking at ways to be made whole.” Few employers or employment lawyers had considered the implications of the FLSA until around 2000, but she added that “many plaintiff lawyers during the recession saw such claims as a low-hanging fruit”—and one that has gained increasing traction. In 2013 there was a further rise in wage and hour claims and it seems unlikely the issue is going to go away any time soon.

There is, however, one piece of positive news for those employers deluged with wage and hour claims. “Claims are increasing in frequency, but settlements are not,” said Adele. Gone are the days of the $100 million settlements that were a feature of the early 2000s, she said, with employers becoming increasingly savvy about exposures and willing to defend themselves in court. “In the past they would settle the claims for whatever amount the plaintiffs were demanding. With case law now being more positive towards employers and with greater awareness, more companies now feel comfortable defending themselves in such cases.” However, this also means that the costs of defence are rising.

Nevertheless, there are holes in FLSA compliance that continue to present opportunities for plaintiffs. “According to statistics from the Department of Labor, close to 70 percent of companies are not compliant with the FLSA,”said Adele, and it is clear that more can be done to insulate companies from potentially damaging claims. Further pressure is being exerted by an increasingly active Department of Labor and employees aware of their rights, she said. So while the severity of settlements may have come down, their frequency remains a source of some concern and one for which brokers such as Marsh believe they have a solution.

A welcome addition

As a result of rising claims in the 2000s, exclusions for wage and hour claims—which were already largely the norm—became universal, leaving many companies exposed to potentially costly litigation. The situation led a number of brokers and carriers to explore the possibilities of standalone wage and hour coverage. In the case of Marsh, it has created a product that extends comprehensive coverage for both defence and indemnity and is particularly suited to class action and collective action claims, said Adele. Launched in January of this year, it has provoked significant interest from the market, with the broker anticipating a strong pipeline of deals going forward. It looks likely to fill a significant hole in the liabilities of US employers.

Addressing what can be done by companies to drive down wage and hour claims, Adele said that companies can pursue three concrete steps:

(i) Hire qualified and well trained human resources professionals who are familiar with all elements of the FLSA;

(ii) Carry out regular audits of employee practices to ensure that the company is in compliance with FLSA and state wage and hour laws; and

(iii) Consult outside legal counsel with expertise in the area that can provide a ‘good-faith’ defence to liquidated damages under the FLSA in the event of a claim.

While it is evident wage and hour claims will continue to rise, increasing knowledge of the threat, and standalone wage and hour coverage such as that offered by Marsh, offer the potential to mitigate the worst effects of rising litigation. It will undoubtedly remain an ongoing issue for a decidedly litigious US, but the insurance industry has now grasped the nettle in providing coverage specifically tailored to wage and hour claims. Cases and claims will undoubtedly be watched with interest.