“Our employees are like family; they would never sue us.”
“I can bring in people as independent contractors and not have to provide benefits or withhold income tax.”
“If I pay an employee a salary, he or she is exempt and I don’t have to pay overtime.”
In all likelihood, many of your clients have made one or more of these statements and sincerely believed it to be true.
Glenn Clark, CPCU, president of program administrator Rockwood Programs, has bad news: Each of the statements above is a myth, and anyone who believes it or practices it is vulnerable to a lawsuit alleging violations of federal wage and hour regulations. Agents and brokers, he says, are uniquely positioned to help their clients understand and respond appropriately to emerging laws governing wage and hour issues on both the state and federal levels.
“Wage and hour is the new ‘goldmine’ for employment law attorneys,” Clark declares. “For example, if an employee is expected to answer email or take phone calls after hours, it has been construed that he or she is still on the clock and is due compensation.
“If a non-exempt employee works from home voluntarily, without being authorized to do so, he or she must be paid for all hours worked,” he explains. “A non-exempt employee who works 40 hours per week and extra hours at home answering emails may have a legitimate claim. Even if their work at home doesn’t result in overtime, they would have an unpaid wage claim.”
Payment of a salary, Clark comments, “is only one of many requirements to create an ‘exempt’ employee. So, although state and federal rules regarding overtime, meal and rest periods, and similar wage/hour laws do not apply to exempt employees, don’t assume that someone paid a ‘salary’ is exempt. Mistakes are costly: unpaid overtime, interest, penalties, and more.”
The proliferation of mobile devices is blurring what used to be the clear lines between working and nonworking hours, Clark says. “More and more often, employers are allowing staff members to use their personal devices—computers, cell phones, notepads, and so on—for work purposes. Firms that condone these practices must ask themselves two questions:
“First: Do the devices provide an adequate audit trail to track business activities conducted outside the work environment?
“Second: Does giving employees remote access to company-held electronic information trigger any violation of federal and/or state privacy and data security laws?”
For decades, employers have “staffed up” by bringing in people to work on a temporary (often long-term) basis and treated them as independent contractors for whom they don’t have to provide benefits, pay Social Security tax, or withhold federal and state income tax.
That strategy can backfire, Clark cautions. “Courts have held that if someone works full time for an employer and is subject to the employer’s direction, that person is an employee and must be paid through payroll and issued a W-2 form at year end,” he says. “If you exercise control over what a worker does on your premises, you are that person’s employer. Misclassifying someone as an independent contractor can result in substantial penalties and back taxes and can have implications for benefit plans.”
Another myth that can be costly, Clark says, is the belief that it’s easier to terminate employees who are on probation. “Many employment laws apply on the first day of employment,” he notes. “Because at-will employees are always on probation, having a defined ‘probationary period’ actually hurts the employer and can restrict its right to terminate a poor performer.”
The most widely held assumption— “My employees are like family and would never sue me”—has proved time and again to be false, Clark observes. “Family members sue each other all the time,” he points out. “The fact is that even small businesses are vulnerable to employment-related claims. Recent statistical data shows that a plaintiff will win an employment related lawsuit filed in state court about 67% of the time.”
Emerging issues
Other wage and hour-related issues that confront employers merit serious attention, Clark says.
“At the federal level, the debate over whether to increase the minimum wage, and by how much, is garnering significant attention,” he remarks. “The Congressional stalemate over this issue has not prevented several states from making moves on their own. So far this year, six states have enacted increases, and 21 other jurisdictions have instituted minimums that exceed the federal standard.”
The take-away for employers, Clark says, is: “Beyond complying with these wage increases when paying nonexempt personnel, employers must be cognizant that state-mandated minimums also affect exempt staff members who are subject to minimum salary tests enacted in those same jurisdictions. For example, California has a requirement that certain exempt employees can earn an annual salary of at least twice the minimum wage.”
Another concern for employers, Clark notes, is intensified enforcement of federal wage and hour laws. “The newly appointed director of the Department of Labor’s Wage and Hour Division in 2010 generated a report that has led to a significant increase in WHD investigations and penalties, localized enforcement initiatives, and a stated goal of achieving 90% wage and hour compliance across all industries by 2016,” Clark observes.
“A more worrisome aspect for employers is the report’s focus on an expanded penalty policy as a ‘central element of deterrence’ and increased litigation to ‘prevent noncompliance.’ Many state-level enforcement agencies have been taking a similarly aggressive stance,” Clark cautions.
The Wage and Hour Division also is targeting the use of independent contractors under its “Misclassification Initiative,” Clark says. “Equally important, a company’s practice of retaining the services of individuals as contractors may lead to an increased exposure to class-based litigation.”
He offers this insight: “When making a judgment, courts look to the ‘economic reality’ of the situation. Relevant factors taken into consideration include the degree of permanence maintained in the working relationship and whether the service rendered is an integral part of the employer’s business. Courts tend to interpret these factors narrowly and typically side with the individual if the ruling is a close call,” Clark explains.
Another common misclassification of employees occurs when an employer uses unpaid interns, Clark observes, and this practice is receiving increasing scrutiny. “Federal and state employment laws do allow for unpaid internships,” he says. “The litmus test that courts will use in determining whether the designation is appropriate has to do with the tasks being performed.
“The classification will be accepted if the individual is undergoing training for his or her own benefit. Courts will treat interns as employees entitled to compensation if they are performing productive activities that directly benefit the employer, displacing or doing the work of regular employees,” Clark explains.
Yet another issue of concern relates to one firm’s acquisition of another. “When one company purchases another, it typically does not inherit the seller’s liabilities in the asset purchase transaction,” Clark says. “Most buyers assume they cannot be held liable for the seller’s Fair Labor Standards Act (FLSA) violations, and some even expressly disclaim liability for such claims in the asset purchase agreement. Developing law, however, holds that such buyers can be held liable if they are considered a ‘successor firm’ under federal common law.”
A solution that works
Agents and brokers, Clark asserts, can play a key role in helping their clients understand their increasing exposure to wage and hour-related lawsuits—and in arranging appropriate insurance to address those exposures. Failure to offer the needed protection—and document the client’s acceptance or rejection—can result in an E&O lawsuit.
The relevant coverage is employment practices liability insurance (EPLI), and the product has been steadily gaining popularity since it was introduced in the late 1980s.
“Back then, EPLI was a difficult sale for an agent to make,” Clark recalls. “Most employers assumed they were already covered under existing GL and D&O policies. Others didn’t see a need to pay extra for a coverage they thought they’d never use. Awareness has been heightened by the proliferation of employment-related suits over the last 20 years.
“Now EPLI is available as a standalone product and is gaining acceptance, but the sad fact is that less than 25% of the companies that should buy the coverage actually do so,” he notes.
Simply put, EPLI provides defense and indemnity protection against claims that arise from the employer/ employee relationship. The policy covers employers—plus all current, former, and prospective employees, directors and officers, even the corporate entity—for a broad array of employment-related claims.
Rockwood Programs, the program administrator that Clark heads, offers an EPLI policy with liability limits up to $5 million per occurrence/$5 million aggregate, with higher limits available if required. The policy covers claims anywhere in the world, provides full prior acts coverage, and contains a wage and hour sub-limit. Coverage for alleged violations of the Immigration Reform and Control Act can be added via endorsement at no cost, subject to a sub-limit. Defense outside limits can be added via endorsement, and policyholders have access to a risk management hotline staffed by legal experts.
The policy’s definition of employee includes contractors, volunteers, and leased employees under the direction of the insured. The definition of loss includes compensatory, punitive, and exemplary damages where allowable by law. The policy is available on an admitted basis in 46 states and on a non-admitted basis in the remaining states. Coverage is written with an insurer rated A+ by A.M. Best.
The linchpin of the Rockwood EPLI policy, Clark says, is advocacy claims defense provided by the nationally recognized firm of Wilson Elser, an expert in the defense of professional liability actions. “We’re proud to partner with Wilson Elser and to offer their services to our EPLI policyholders,” Clark states. “They mount a vigorous defense on behalf of our insureds and are knowledgeable, reliable, and conscientious. All of our policyholders have access to an employment practices hotline staffed by the experts at Wilson Elser. The hotline is a valuable tool to help our insureds prevent future losses.”
The bottom line, Clark says, is: “Even if a claim is groundless, it has to be defended, and we provide our insureds the best possible defense against EPLI actions. Employment law is becoming increasingly complex, and our legal team can help guide our insureds through the many emerging changes.”
Make it a habit
Why should agents routinely quote EPLI on both new and renewal accounts? “Our other specialty is insurance agents E&O,” Clark notes. “We see a rising number of suits from clients who do not have EPLI blaming their agents for not telling them about it. It’s an E&O defense, mitigating your exposure from clients who allege you did not tell them about EPLI. Offering EPLI differentiates your quotes from those of the competition— and you might just sell a few policies and grow your agency’s bottom line.”
For more information: Rockwood Programs Inc. Website: www.rockwoodinsurance.com.
