Smaller Wage & Hour settlements spur coverage for payroll risk

By Cate Chapman on June 17, 2015

Wage & Hour filings continue to grow, but shrinking settlements and the spreading adoption of arbitration clauses and class-action waivers that could curtail claims are helping to extract coverage for employers against the payroll risk.

“The loss exposure is decreasing to a level where additional insurers can feel comfortable participating,” said Adeola Adele, national EPL product leader at Willis, in a recent Advisen webinar. She was joined by Gerald Maatman, partner at Seyfarth Shaw LLP, and Hunter Pyle, partner at Sundeen Salinas & Pyle.

Bermuda-based carriers introduced standalone policies two years ago in response to restrictive exclusions in employment practices liability insurance for W&H claims. The policies are geared toward companies that employ more than 5,000 and are willing to take retentions of about $2.5 million.

While total market capacity is about $100 million and more domestic competition is needed for expansion and to lower retention levels, Adele said, “these are true solutions because they cover both defense costs and indemnity, and they are intended to cover the typical wage and hour claims.

“We had to convince them that these can be done,” she said of the Bermuda carriers. “Their concerns were that given the rate of settlements at the time, there really was no way for them to make money.”

Settlements have been declining since 2009, when the top 10 totaled $363.3 million, according to Seyfarth Shaw’s Workplace Class Action Litigation report. Last year, those settlements totaled $215.3 million.

But the frequency of claims has grown in each of the past 15 years, with filings on track this year to exceed those in 2014. They have risen from 6,120 in 2009 to 8,066 last year, the only workplace litigation filings to increase.

The fact that most payroll claims are brought as class or collective actions has made it more attractive to plaintiffs lawyers. Add to this the fact that certification for class actions in areas such as discrimination has been made more difficult by recent Supreme Court decisions, and the result is an “explosion” in W&H claims, said Maatman, general editor of the class action report.

Another contributing factor has been a changing work environment that has spawned “off the clock” and remote work, often in the form of independent contracting, all of which are difficult to reconcile with 1938 wage and hour laws.

“Wage and hour remains the No. 1 compliance problem,” Maatman said.

At the same time, though, “newbie” lawyers attracted to the lower barrier of entry to W&H class or collective actions have “created bad case law and settled cases too cheaply,” he said, contributing to the decline in settlement value.

Collective actions, as permitted under federal law, also tend to result in smaller, individual settlements in different states, compared to the mega-settlements found with nationwide class-actions.

But arbitration agreements that compel employees to private dispute resolution and class action waivers, which compel them to resolve those disputes individually, may suppress both the frequency and severity of W&H claims.

“Twenty-five to 30 percent of employers are using them, but all are considering it,” Maatman said of arbitration clauses. Courts in the past five years have found the agreements fair and waivers enforceable, even as the National Labor Relations Board has continued to invalidate them on a case-by-case basis.

Because individual W&H claims tend to be much smaller than for discrimination, the clauses and waivers could suppress these, too.

“If employees are forced into arbitration and arbitration of individual claims, the likelihood they’ll do so is diminished,” said Hunter Pyle, of the Oakland, Calif.-based plaintiffs firm.

“I would not be surprised if there were a falling off of these W&H collective and class actions,” he added.

Even if the conservative majority on the Supreme Court were to strengthen arbitration clauses and make it easier for defendants to uphold class-action waivers in court, though, employers need to consider their disadvantages.

Arbitration is “neither fast nor cheap,” Pyle said. The employer pays for the arbitrator, and their ruling, which generally cannot be appealed, applies only to the individual employee in question.

That means “the employer could face a series of arbitrations in which employees kept going until they got a favorable award,” he said. And, if an arbitrator is “really sympathetic to a plaintiff and awards that person a great deal of money, typically it will be very difficult to attack” the award.

Yet “insurers like arbitration as a part of an insured’s overall risk management strategy,” Adele told Advisen. Both arbitration and lawsuits are included in the definition of “claim” under W&H policies.

“Arbitrations tend to be less costly since the discovery process is shorter and often involves a smaller number of witnesses, motions, etc.,” she said.

The Dept. of Labor is expected to overhaul the Fair Labor Standards Act this summer, updating wage and hour rules for the first time in decade, a development that is likely to heighten compliance issues for some years to come, Maatman said.