The Wage & Hour Threat to Your Organization

One of the advantages of being a national insurance consultant and risk manager is that it allows us to see legal trends that are growing before our clients are hit with the latest threat, and thereby, we often have time to build a defense before the storms hit. One such trend that we are seeing is the rise in employment-related suits, specifically “wage and hour” claims. This is an area where few insurance policies provide automatic coverage, and most simply exclude the coverage altogether. The challenges are further exacerbated by law firms which specialize in prosecuting these types of claims—and reportedly, they are adept at cultivating relationships with your former employees who may be easily agitated into believing they have been aggrieved. In this article on this growing trend, seemingly begun in California and quickly moving east, we will look at the cause of such and offer some tactics to help avoid wage and hour claims against your organization.

The Fair Labor Standards Act (FLSA) was enacted in 1938 and is administered by the U.S. Department of Labor, Wage & Hour Division. Its purpose is to:

  1. Set a minimum wage below which an employee’s pay cannot fall.
  2. Encourage full employment by establishing a maximum number of hours employees can work before an employer must pay overtime additional wages.
  3. Require equal pay for equal work, regardless of age, gender, race and other federally-protected personal attributes.
  4. Safeguard child workers.

Some classes of employees are exempt from both minimum wage and overtime pay. These include executive, administrative, professional employees (i.e. teachers), outside sales employees, certain seasonal employees, and certain farm workers. Otherwise, most employees are subject to wage and hour rules.

Compliance can be complicated, and employers who fail to comply with FLSA can be subject to significant back-pay liability, damages and legal fees. Added to the complexity may also be the consideration of state and local labor laws.

The following are three of the most common employment-related situations that may result in lawsuits.

Unpaid Overtime

This is the most common of Wage & Hour Claims—and it usually comes from a former employee, who often alleges that [you] did not pay for the time they spent checking and responding to email after hours. Some states are beginning to recognize the challenge when employers are unaware that employees are performing work-related tasks after-hours, but we continue to see suits where former (usually disgruntled) employees are suing for back wages plus legal fees.

Mixing Volunteers & Employees

Having a volunteer work alongside someone you are employing, for the same position, opens up your organization to a lawsuit for unfair hiring practices. Recently, a homeless shelter settled a lawsuit from a former resident who, as a part of his work therapy, helped with the dishes alongside an employed individual. While many homeless shelters implement “work therapy” as an exchange for services provided by a resident, a volunteer may not be used to replace the services of an employee.

Compensating Volunteers

Some organizations want to provide some compensation for their workers, but for varied reasons, are unable to offer employment. Therefore, it seems that the best solution is to provide a “stipend” for the person’s time. Any compensation in exchange for work performed must meet federal regulations, including hourly rates for employees. One organization, recently accused of this, was required to pay the unpaid balance of an hourly wage retroactive back to the first day of service.

What to Know: Insurance

Insuring your organization’s Employment Practices Liability (EPL) is complex—and the limits of coverage on the declarations page do not assure Wage & Hour coverage. Very few insurance companies currently provide defense coverage for labor-related claims, and many will provide coverage only when it is specifically requested.

What to Do: The Basics of Risk Management

Ask your HR consultant, insurance broker, lawyer, and risk management team to help you identify other areas to be addressed.

  1. Ensure that your policies & procedures are clear on when/where work is to be performed for your organization.
  2. Establish job descriptions, and periodically review and/or compare them to the employee’s actual job duties.
  3. Keep accurate records of time worked and pay allotted to employees.
  4. Implement an overtime authorization form for all non-exempt (hourly) employees.
  5. Display an official poster, in an employee congregating area (i.e. break room), outlining the requirements of the FLSA.
  6. Utilize outside expertise to ensure that your compensation practices meet federal, state, and local regulations.
  7. Ensure that your Employment Practices Liability coverage includes “wage & hour” (or FLSA) defense—or place at least $30,000 in reserve so you can hire an attorney to respond should you have one of these claims.

Contact us today to learn more.[/vc_column_text]

The Wage & Hour Threat to Your Organization


Brian H. Merriam, CPCU, ARM, AAI
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