Courts Find Cracks in “Wage and Hour” Exclusions

Courts Find Cracks in “Wage and Hour” Exclusions

By David A. Gauntlett*

Introduction

What if a claim typically capable of being asserted in most cases where there has been a wrongful classification of an employee or other failure that technically violated wage and hour law could be covered under standard Employment Practices Liability Insurance (“EPLI”) policies?  And, more critically, what if the insurance coverage would not be within the sublimit for a wage and hour claim, but subject to the full policy benefits.  That would be a game changer.  That is precisely what a recent decision from a California Court of Appeal concluded may be possible.

Case Law Does Not Establish Lower Limit for Dissemination

In So. Cal. Pizza Co., LLC v. Certain Underwriters at Lloyd's, London etc.,[1] plaintiff (owner and operator of over 250 restaurants) allegedly violated California Labor Code sections 2800 and 2802 by failing to reimburse its delivery drivers for mileage expenses, as well as work-related personal cell phone charges. The defendant, Certain Underwriters at Lloyd's, London etc. (“Underwriters”) asserted that those claims were barred by that exclusion.[2]

The Court disagreed with Underwriters’ legal argument.  It held that those employees’ claims were premised, not on failure to pay wages for work performed, but rather on the failure to reimburse for work-related expenses incurred. 

Disbursements for losses and work-related expenditures are not payments made in exchange for labor or services. . . . The former protects employees from an employer's lack of reasonable care and diligence . . . , as well as ensures employers are “bear[ing] all of the costs inherent in conducting [their] business[es]” [citation]. And the latter “ ‘prevent[s] employers from passing their operating expenses on to their employees.’ ” . . .

Given section 2802 's language, function and purpose, it is unsurprising our Supreme Court previously characterized claims seeking reimbursement of business expenses as “nonwage” claims.[3]

Thus, these business expenses could be deemed a claim for “employment-related work place torts” within the meaning of the insuring agreement.[4] As a consequence, those business expense claims did not fall within the wage and hour exclusion.[5]

Additional Benefit—Dodging Defense Sub-Limit

Many companies suffer from the expense of defending wage and hour class action lawsuits.  Some employers who choose to purchase an EPLI policy have received defense benefits in wage and hour class action suits.  But this benefit is typically limited by a specific policy provision providing an express sub-limit covering wage and hour claims.  Any monies expended beyond the sub-limit are not recoverable.  Fees incurred before the sub-limit attaches, typically in a deductible, must be paid by the policyholder before the sub-limit policy benefit kicks in.  As a practical matter, this makes wage and hour sub-limit insurance offered in a “defense only” policy with sub-limits of less value to policyholders.

In So. Cal. Pizza Co., it did not matter that there was a $250,000 wage and hour sub-limit.[6]  Its existence did not bar potential coverage for all defensive legal work for a class action wage and hour lawsuit because the business expenses that were unpaid were not wage and hour claims.

Subsequent Cases Agree

In Naro v. Walgreen Co,[7] the court cited So. Cal. Pizza Co. in support of its determination that California law distinguishes between unreimbursed business expenses and withheld wages.

There is thus a “valid and important distinction between wages (as payment for labor performed) and business expense reimbursement” . . . .

Consequently, “[d]isbursements for losses and work-related expenditures are not payments made in exchange for labor or services.” Southern Cal. Pizza Co., LLC v. Certain Underwriters at Lloyd's, 40 Cal. App. 5th 140, 150, 252 Cal.Rptr.3d 635 (2019) (emphasis added) . . . . “The former protects employees from an employer's lack of reasonable care and diligence as well as ensures employers are ‘bear[ing] all the costs inherent in conducting [their] business[es],’ while “the latter ‘prevents employers from passing their operating expenses on to their employees.’ ”[8]

The plaintiff sued her employer for failing to provide replacements or reimbursements when the clothing initially supplied to her suffered normal wear and tear over the course of her employment.[9] The court acknowledged that clothing could theoretically fall under the category of “wages” but determined that was inappropriate under the present facts:

[I]n Department of Industrial Relations v. UI Video Stores, Inc., 55 Cal. App. 4th 1084, 1088, 64 Cal.Rptr.2d 457 (1997) (quoting Schumann v. California Credit Corp., 105 Cal. App. 136, 140, 286 P. 1068 (1930)), the Court of Appeal stated the unremarkable proposition that “[t]he term ‘wages’ has been held to include money as well as other value given, including room, board, and clothes.” But unlike wages, which constitute “value given” for labor performed, reimbursements reflect value owed to an employee for business expenses incurred by the employee as required by the employer. That clothing may fall into either category alters neither the “valid and important distinction” that the California Labor Code draws between the two nor the mutual exclusivity of each category to the other under California law.[10]

Though not an insurance case, Naro nonetheless highlights the reasoning that precludes a “Wage and Hour” exclusion from affecting claims for unreimbursed expenses.

Buyer Beware—Insurers Adjust Policy Language

W. Marine Prod., Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA[11] similarly concluded that a “Wage and Hour” exclusion could not preclude all claims where the underlying plaintiff asserted “fail[ure] to reimburse for necessary business-related expenses and costs in violation of CLC §§ 2800 and 2802.”[12] Citing So. Cal. Pizza Co., the court acknowledged that §§ 2800 and 2802 claims “suggest a ‘wrongful failure or refusal to adopt or enforce workplace or employment practices, policies or procedures’ that would be covered as an ‘Employment Practices Wrongful Act,’”[13] so the exclusion could not definitively apply to those claims.

Despite this, the insurer was still able to secure one victory: application of the panel counsel rate for its duty to reimburse the policyholder’s defense expenses.[14] Unsurprisingly after the So. Cal. Pizza Co. decision determined the defense sub-limit could not be applied, the National Union policy at issue included language that any claim excluded “in part” by the “Wage and Hour” exclusion would be subject to panel counsel rates.

Ordinarily, the presence of excluded claims is irrelevant to an insurer’s duties since only the allegations generating potential coverage should be examined.[15] Insurers are increasingly attempting to bypass this aspect of coverage law by writing polices where provisions benefiting them, such as exclusions and rate limitations, apply to an entire suit if they apply to any claim in that suit.[16]

Conclusion

The benefits of the So. Cal. Pizza Co. coverage analysis are not limited to obtaining a defense in a pending wage and hour class action claim.  Re-visitation of coverage denials by insurers could unearth great opportunities for financial recovery.  The four-year statute of limitations under California law for the termination of the underlying action through all appeals may give rise to significant potential recovery.  All that is required is that the insurer’s coverage denials under EPLI policies are inconsistent with what the So. Cal. Pizza Co. court determined was applicable California coverage law. 

It is a simple exercise to re-evaluate whether an insurer denial is wrongful.  All that is required often is to review the denial letter in light of recent coverage law and determine whether the time for taking action against a wrongful denial of coverage has not passed. In many cases, there may still be more than sufficient time to pursue coverage for what now, clearly, wrongful denials of coverage.

*David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 553-1010 by voicemail or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.

[1] So. Cal. Pizza Co., LLC v. Certain Underwriters at Lloyd's, London etc., 40 Cal. App. 5th 140 (2019).

[2] The exclusion precluded coverage for “any Loss resulting from any Claim based upon, arising out of, directly or indirectly connected or related to, or in any way alleging violation(s) of any foreign, federal, state, or local, wage and hour or overtime law(s), including, without limitation, the Fair Labor Standards Act . . . .” Id. at 145.

[3] Id. at 150–51.

[4] For additional discussion of what claims fall within the coverage grants in EPLI policies, see David A. Gauntlett, Coverage for Employment Disputes, Orange County Bar Association Employment & Labor / Insurance Law Joint Section Meeting, February 9, 2015.  

[5] For additional analysis of claims falling within and outside the “Wage and Hour” exclusion, see David A. Gauntlett, Insurance Coverage for Wage and Hour Claims, 2014 Emerging Issues 7192 (LexisNexis 2014).

[6] Id. at 154.

[7] Naro v. Walgreen Co, No. 22-CV-03170-JST, 2023 WL 3579315 (N.D. Cal. Feb. 9, 2023).

[8] Id. at *2.

[9] Id. at *1.

[10] Id. at *3.

[11] W. Marine Prod., Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, 572 F. Supp. 3d 841 (N.D. Cal. 2021).

[12] Id. at 845.

[13] Id. at 855.

[14] Id.

[15] Waller v. Truck Ins. Exch., 11 Cal. 4th 1, 16 (1995) (“Before ‘even considering exclusions, a court must examine the coverage provisions to determine whether a claim falls within [the policy terms].’”)

[16] See David A. Gauntlett, Why Evaluating Coverage for Intellectual Property Is Challenging, https://www.gauntlettlaw.com/news/why-evaluating-coverage-for-intellectual-property-is-challenging (May 5, 2022) (addressing broad exclusions like that in Spandex House, Inc. v. Hartford Fire Ins. Co., 407 F. Supp. 3d 242, 253 (S.D.N.Y 2019) (aff’d on other grounds, Spandex House, Inc. v. Hartford Fire Ins. Co., 816 Fed. App’x 611 (2nd Cir. (N.Y.) 2020)) that apply to “[a]ny injury or damage alleged in any claim or ‘suit’ that also alleges [excluded conduct].”)