Insurance Law

California Insureds Should Question the “Conventional Wisdom” Regarding Coverage for Wage and Hour Class Actions

    By Erica Villanueva, Associate, Farella Braun + Martel

Employment Practices Liability ("EPL") insurers have been aggressive in denying coverage for "wage and hour" class actions filed in California and elsewhere.  Indeed, insureds now frequently assume that their policies afford no coverage for such claims.  Depending on the particular statutory violations alleged, however, such class actions often fall within the scope of EPL coverage.  Depending on the policy language, an EPL insurer may have a duty to both defend and indemnify an insured against a "wage and hour" class action.

The "FLSA Exclusion" Does Not Apply to Many Alleged Violations of California Statutes.
EPL policies often contain an exclusion which bars coverage for "alleged violations of the Fair Labor Standards Act...or any similar federal, state or local statute."  The Fair Labor Standards Act ("FLSA") is a federal statutory scheme whose central components are: 1) establishment of a federal minimum wage; 2) prohibition of employment for more than 40 hours per week, unless a premium is paid for excess hours worked (i.e., "overtime"); and 3) prohibition of child labor.

In a California wage and hour class action, many of the statutes typically invoked are not at all "similar" to the FLSA.  For example, such lawsuits frequently allege that the employer:
(1) failed to reimburse its employees for uniforms or other required business expenses (
California Labor Code Section 2802);

(2) failed to promptly pay employees, at regular bi-monthly intervals, all wages earned during the preceding pay period (
Section 204);

(3) failed to provide accurate wage statements (
Section 226(a));

(4) failed to pay employees all wages due immediately upon the employee's discharge or within 72 hours of the employee's voluntary resignation (Sections
201 and 202);

(5) failed to pay a split-shift premium wage (IWC Wage Orders); and/or

(6) improperly retained a portion of employees' tips (
Section 351). 

None of these statutory provisions have any FLSA counterpart.

Moreover, while EPL insurers have made much of the Tenth Circuit's recent decision in Payless Shoesource, Inc. v. Travelers,
585 F.3d 1366 (2009), no California court has ever held that any California Labor Code provision is "similar" to the FLSA.  The three published California district court decisions are split on this issue.  See Big 5 Corp. v. Gulf Underwriters Ins. Co., Big 5 Corp. v. Gulf Underwriters Ins. Co., 136 Fed. Appx. 996 (9th Cir. Cal. 2005); SWH Corp. v. Select Ins. Co., 2006 WL 2786930 (C.D. Cal. Sept. 28, 2006); California Dairies, Inc. v. RSUI Indemnity Co. 617 F.Supp.2d 1023, 1048-1050 (E.D. Cal. 2009).

SWH Corp. ruled that a FLSA Exclusion was ambiguous.  In Big 5, the underlying litigation only involved allegations that the employer violated California overtime laws.  The FLSA clearly regulates overtime.  Finally, California Dairies held that Sections
201, 202, 226(a), and 2802 are not "similar" to the FLSA, and therefore alleged violations of those statutes do not trigger the FLSA Exclusion.

Wage and Hour Class Actions Often Seek To Recover Insurable Damages.

Even if the EPL insurer concedes that its FLSA Exclusion does not completely bar coverage, and it therefore has a duty to defend the case, the insurer will often resist funding settlement of a wage and hour class action on the ground that such lawsuits do not seek to recover "insurable damages."  Insurers argue that the only remedies for such alleged statutory violations are restitutionary payments (uninsurable as a matter of law) and/or penalties (usually excluded from coverage under the policy).  Therefore, EPL insurers insist, any settlement constitutes liability that is either uninsurable or excluded.  Once again, insureds should not simply accept the insurers' representations on this point.

Several of the statutes frequently invoked by plaintiffs in wage and hour class actions entitle them to recover damages.  For example,
California Labor Code Section 226.7 entitles an employee to recover one additional hour of pay for every missed meal or rest period.  See Cal. Lab. Code sec. 226.7(b).  Such amounts do not represent unpaid compensation for hours worked, as the required rest period is only ten minutes long, and the required meal period is 30 minutes in length.  Rather, the remedy is in the nature of liquidated damages.  See Murphy v. Kenneth Cole Productions, 40 Cal. 4th 1094, 1112-13 (2007) (holding that Section 226.7 compensates employees for "the noneconomic injuries employees suffer from being forced to work through rest and meal periods.")  Similarly, Section 226 provides that an aggrieved employee is entitled to recover his "actual damages" suffered as a result of his employer's failure to provide accurate wage statements.  See Cal. Lab. Code § 226(e).

Finally, it is important to note that the typical EPL policy definition of covered "Loss" is not strictly limited to "damages."  "Loss" is often defined to include "other amounts...that the Insured becomes obligated to pay."  Such "Loss" definitions are broad enough to encompass claims for statutory attorneys' fees.  (Indeed, some policies expressly define "Loss" to include "statutory attorneys' fees.")  Recovery of statutory attorneys' fees is authorized under numerous sections of California Labor Code, including Sections
218.5, 226, 1194 and 2699.  Of course, such statutory fees frequently make up a large proportion of plaintiffs' demands.

As the foregoing discussion demonstrates, the law governing insurance coverage wage and hour class actions is far from settled.  California insureds should reject the "conventional wisdom" that EPL insurance simply does not cover such lawsuits.  The insured should closely examine its own policy language and the specific allegations of the underlying complaint to determine whether the potential for coverage exists.

See Farella Braun + Martel's  Farella's Policyholder Perspective blog at http://www.farellacoveragelaw.com/2010/06/california-insureds-should-question-the-conventional-wisdom-regarding-coverage-for-wage-and-hour-class-actions.html.