Employment-Related Litigation Risks and Insurance Coverage for Hospitality Companies in 2023

From JDSupra, Huiyi Chen and Jan Larson discuss litigation risks for companies in the hospitality industry including misclassification claims that workers were misclassied as independent contractors. Huiyi and Jan write:

Entering 2023, businesses in the hospitality industry continue to face significant litigation risks arising out of employment-related claims. In this article, we will highlight three areas of employment-related litigation risks facing hospitality companies: wage and hour claims, BIPA and other privacy actions based on collection of employees’ biometric information, and human trafficking claims. A common tool available to manage risk in each of these areas is insurance. Accordingly, we also identify and discuss potential insurance coverage disputes common to these risk areas through examination of recent case law.
I. Wage and Hour Claims
Wage and hour claims continue to pose a high risk to hospitality companies, with companies facing investigation and litigation as a result of alleged violations of state and federal wage and hour laws, including failure to pay overtime, failure to provide meal and rest breaks as required, and misclassification of employees as independent contractors, to name a few. “Hotels and Motels” as well as “Food Services” are two so-called “Low Wage, High Violation Industries” designated by the US Department of Labor’s Wage and Hour Division (WHD), and in the 2022 fiscal year, the WHD brought over 4,000 enforcement actions against employers in those industries, recovering over $30 million in back wages for over 25,000 employees.^[1]
Entering 2023, wage and hour lawsuits have been filed against hotels around the country—several dozen cases filed in federal courts alone, alleging various violations of state and federal wage and hour laws. For example, on February 14, 2023, non-exempt employees filed a class action complaint against AIL Hospitality Group in the federal court of the Western District of Pennsylvania, alleging violations of the Fair Labor Standards Act, the Pennsylvania state wage and hour laws. Bordner v. AIL Hospitality, LLC, Case No. 1:23-cv-00033 (W.D. Penn.).
When faced with employment-related litigation, the first place to seek insurance coverage would usually be Employment Practices Liability Insurance (EPLI or EPL). EPLI policies generally cover “those sums the insured becomes legally obligated to pay as damages resulting from a ‘wrongful employment act’” as defined in the relevant policy and provide the opportunity for coverage of the cost of the defense and potential liability in the underlying employment-related litigation.^[2]In other words, EPLI policies could potentially cover both the defense fees and costs and a later settlement or adverse judgment in connection with a covered claim.
Importantly, however, EPLI policies sometimes contains an exclusion related to wage and hour laws. Although the exclusion might have different names and wordings under specific policies, it generally purports to exclude any claim arising from “[a] violation of [the employer’s] responsibilities or duties required by any [ ] federal, state or local statutes, rules or regulations, and any rules or regulations promulgated therefor or amendments thereto . . . .”^[3]Courts have broadly interpreted the exclusion to bar coverage as to allegations involving violations of the Fair Labor Standards Act (FLSA) or similar state and local wage and hour laws and regulations. See, e.g., E.H. Summit, Inc. v. Carolina Cas. Ins. Co., No. 216CV00307SVWPLA, 2016 WL 7496142, at *8 (C.D. Cal. Feb. 24, 2016) (granting insurer’s motion to dismiss a coverage lawsuit on the grounds that the “Wage and Hour Laws Exclusion” applied and the insurer had no duty to defend the underlying lawsuit alleging violations of California wage and hour laws). Similar limitations are also sometimes found in an EPLI policy’s definition of “Loss”—for example, the policy could define “Loss” as excluding “[a]mounts owed under federal, state or local wage and hour laws.” See Gauntlett v. Ill. Union Ins. Co., No. 5:11-CV-00455 EJD, 2012 WL 4051218, at *8 (N.D. Cal. Sept. 13, 2012).
The purpose of the wage and hour laws exclusion is to avoid a “moral hazard,” which, “in its most extreme form, is the temptation of an insured to precipitate the event insured against if the insurance goes beyond merely replacing a loss.” Farmers Auto. Ins. Ass’n v. St. Paul Mercury Ins. Co., 482 F.3d 976, 978 (7th Cir. 2007). In the context of wage and hour claims, “[i]nsurance against a violation of an overtime law, whether federal or state, would enable the employer to refuse to pay overtime and then invoke coverage so that the cost of the overtime would come to rest on to the insurance company,” which enables the employer to “violate[ ] the overtime law with impunity,” “unjustly enriching itself by the difference between the overtime wage for the hours in question and the straight wage.” Id. at 978–79.
In the face of such exclusions, policyholders have tried, with varies levels of success, to preserve coverage for wage and hour claims by distinguishing the legal basis of the underlying lawsuit from wage and hour laws. In Southern California Pizza Co., LLC v. Certain Underwriters at Lloyd’s, London, for example, the California Court of Appeal agreed with the insured’s argument that certain sections of the California Labor Code requiring the insured (owner of hundreds of Pizza Hut and Wing Street restaurants) to reimburse delivery drivers for mileage expenses and cell phone expenses were not “wage and hour laws” covered under an exclusion in the EPLI policy at issue, and therefore the exclusion did not apply to the underlying litigation based on those sections. 40 Cal. App. 5th 140, 144, 146, 150–52 (2019), as modified on denial of reh’g (Sept. 20, 2019). Specifically, the appellate court reasoned that “[n]either [section] mentions wages or hours, nor do they appear in the parts of the Labor Code titled ‘compensation’ or ‘working hours’” and that “[d]isbursements for losses and work-related expenditures are not payments made in exchange for labor or services.” Id. at 150. Contrast Admiral Ins. Co. v. Kay Auto. Distributors, Inc., 82 F. Supp. 3d 1175, 1181–82 (C.D. Cal. 2015) (finding one of the sections at issue in Southern California Pizza Co., LLC was indeed “wage and hour laws” within the meaning of the exclusion because it is frequently paired with other wage and hour laws in actions alleging underpayment against employers and serves a similar function to “prevent employers from offloading expenses onto their employees, whether by wage theft or by failing to reimburse them for business costs,” as well as based on the moral hazard rationale discussed above).
To manage the risk associated with wage and hour claims and avoid potential insurance coverage limitations, hospitality companies can purchase a standalone or dedicated wage and hour policy or negotiate to obtain a wage and hour enhancement endorsement to an existing EPLI policy. This may be especially important for large companies with a high number of non-exempt employees and a higher risk of being the target of employment-related putative class actions. Notably, however, the standalone wage and hour liability policies covering both defense and indemnity often come with high premiums, and less expensive add-ons or endorsements to existing EPLI policies are more limited in scope, usually covering only the cost of the defense.^[4]