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FI Observer: Wage & hour and the gig economy - a financial institutions’ risk 

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May 2, 2019

In this edition of our FI Observer We look at the significant source of liability for Financial Institutions and their directors and officers is their status as an employer

A significant source of liability for financial institutions and their directors and officers is their status as an employer. Allegations of harassment, discrimination, wrongful termination, retaliation, failure to promote, and pay inequality, among others, definitely keep senior company leaders up at night. And while employment practices liability (EPL) policies are widely available and regularly purchased to address these perils, there remains one clear coverage gap in nearly all EPL policies – meaningful coverage for violations of wage & hour laws. Limited defense costs coverage may be available from some EPL insurers, but nothing that truly transfers what could be a severe risk.

The laws

Every US company must comply with federal and local pay laws. The Fair Labor Standards Act of 1938 (FLSA) is a US labor law that establishes minimum wage, overtime pay, recordkeeping, and youth employment standards applicable to employees in both the public and private sectors. Failure to adhere to the FLSA and other federal and local laws can result in claims that lead to significant financial loss. Under the FLSA, employees can recover two (2) years of back wages per employee, and three (3) years if there is a finding of a “willful violation”. In addition, liquidated damages are often awarded, as well as attorney fees.

The claims

Often brought as class or collective actions, common wage and hour claims allege:

  • Misclassification of employees
  • Miscalculation of wage and/or overtime rates
  • Disputes over recorded time, including meal and rest breaks and work performed off-the-clock

The evolving risk

The evolution of the gig economy is leading to more exposure to wage and hour claims. Employers, including FIs, are relying more on independent contractors and freelancers to reduce their payroll costs and tax liabilities. If properly classified, gig workers are not entitled to certain employment benefits like FLSA minimum wages and overtime pay. The use of more independent contractors leads to more risk for misclassification claims.

Personal liability

In addition, several states (CA, NY, IL, PA, CO) have expanded the definition of “employer” in their respective wage acts to allow for personal liability against managers, directors and officers. While traditionally the company itself is required to indemnify the individuals, so long as they were acting in the course and scope of their employment, if the company is insolvent or unable to indemnify, then the individuals are at risk for personal liability.

The facts for FIs

  • Wage & hour filings have increased by over 450% in the last 15 years - now outpacing EPL claims
  • FIs comprised 16 of the top 50 largest settlements and verdicts since June 2013 – a total value of $408M and an average value of $25.5M. These amounts do not include defense costs, which can be significant
  • Banks have considerable exposure given the large numbers of hourly employees. Banks made up 14 of the top 50 settlements
  • Outdated legislation that does not align with the modern workforce and varying state laws that often impose a higher standard than the FLSA are increasing the exposure

The solution

There is an insurance solution for firms to transfer wage and hour risk. Wage and hour policies cover defense costs and indemnity for a firm’s alleged failure to comply with federal, state and local wage laws. The wage and hour policy can either be purchased on a stand-alone basis or the limits can be shared with the EPL policy for cost synergies.

Wage and hour policies are most widely available in the Bermuda market, where the appetite is geared towards large employers (more than 10,000 employees). Policies can also be purchased in London and, to a lesser extent, in the US. The appetite for small to mid-sized employers has gn in recent years in Bermuda, London, and the US. There is now at least $250M of total capacity available in the global market.

A wage and hour policy indication of limit, retention, and premium can be obtained based on a recent EPL application. A wage and hour application will be required in order to get firm pricing and a bindable quote.

We recommend clients work with their licensed Willis Towers Watson FINEX broker to evaluate the wage and hour coverage gap and to consider an insurance solution.

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