How to prepare for a wage and hour claim — before it hits your business

Wage and hour claims are liability claims or lawsuits from an employee (plaintiff) against their employer for uncompensated work hours.

Some examples of these allegations are unpaid overtime, misclassification of an exempt versus a non-exempt employee, missed meals/breaks, pooling of tips, donning and doffing, which is putting on and taking off certain work cloths or protective clothing, and on/off the clock allegations. All of these fall under the Fair Labor Standards Act that sets minimum standards for wages and overtime.

“An allegation of a wage and hour claim can quickly become an employer’s nightmare,” says Shane Moran, vice president at ECBM. “The claim can very easily become a class action lawsuit involving hundreds or perhaps thousands of employees. Plaintiff counsel will petition the court to get a court order requiring that the employer release the names and addresses of similar situated employees, and now counsel has a way of adjoining many other employees to effectively increase any settlement amount.”

Smart Business spoke with Moran about what employers need to know about wage and hour claims, including how to protect your company.

Where do wage and hour claims occur?

There are really no sectors of the economy that are immune to wage and hour allegations. There are, however, several sectors that see a larger percentage of allegations, such as health care, financial services/insurance and retail. These areas represent the bulk of the claim activity. Other sectors that contribute include transportation, food and manufacturing.

Geographically, California continues to lead in terms of allegations as well as the percentage of dollars paid. Florida is another state that has seen a recent increase in both allegations and dollars paid. Two other states that continue to be problematic are New York and Illinois. However, according to the 2013 National Economic Research Associates (NERA) survey, New York has seen a significant drop — approximately 50 percent — in its percentage of dollars paid.

How costly can these suits be for employers?

Again, according to the NERA 2013 Trend in Wage and Hour Settlement Report, the average cost to resolve a case in 2013 was $4.5 million dollars, while the median settlement value was $2.8 million dollars. So, as you can see these allegations can become very costly for an employer.

What else do employers need to know about wage and hour claims?

For the most part, there is no insurance coverage under Directors and Officers Liability or standalone Employment Practices Liability Insurance (EPLI) policies
Some carriers will provide a sublimit for defense only. Several years ago, a few carriers were offering sublimits of $500,000 or even $1 million, but those limits have now been reduced to $100,000 to $250,000. So when you look at the average cost to resolve a claim versus the sublimit of coverage, you are in affect self-insuring this exposure.

For very large companies, there are policies that you can purchase to cover this exposure, but they have large retentions and premiums that can be prohibitive.

What is the biggest mistake employers make when it comes to covering this exposure?

Many business owners simply assume that since they purchased an EPLI policy, they have coverage for these allegations.

The first step to correcting this problem is to understand what is covered — and more importantly what is excluded within the policy. Like every insurance policy, the devil is in the details; look at both the individual exclusions and the definition of a ‘loss.’

With little insurance coverage available, what can business owners do to avoid or reduce the risk of these lawsuits?

Having an audit of policies and procedures is a good starting point. Are you classifying employees correctly, such as exempt versus non-exempt? How are you capturing work time records? Are you in compliance with minimum wage? Do you pay commissions? How are deductions handled?

Also, ensure your HR and payroll departments understand the laws that apply in each state you operate. Keeping accurate and up-to-date records is essential to any defense.

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