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Beware of the Wage-and-Hour Giant!

Over the past decade, wage-and-hour lawsuits have been an escalating threat to companies that is reaching epic proportions.  Wage-and-hour lawsuits now outranking discrimination lawsuits in both number of filings and size of settlements.  These types of employment practices lawsuits have become an unforeseen calamity for companies across all industry sectors and a new challenge for risk managers.

In 2004, alterations made to the Federal Labor Standards Act (FLSA) by the US Department of Labor (DOL), originally intended to clarify exemptions and definitions to simplify compliance, actually awakened a sleeping giant because it sparked awareness among the plaintiff’s bar. The DOL and certain state labor departments have dramatically stepped up enforcement efforts in recent years, and the Obama Administration has ramped up the DOL’s Wage-and-Hour Division by adding hundreds of wage and hour investigators. These elevated regulatory efforts not only result in more fines, but precipitate class action type civil lawsuits (technically called collective actions) by employees under the FLSA and equivalent state labor laws.

FLSA rules, the basic federal rules governing minimum wage and overtime pay, appear straightforward on the surface.  But most of these rules were established during the industrial age, and do not relate well in an information age economy.  Upon closer inspection, it becomes apparent that many of the rules draw blurry lines when analyzing the contemporary workplace. Defining on-the-clock versus off-the-clock hours can be a challenge, and distinguishing exempt from nonexempt employees is much more complex than most realize. The FLSA was initially devised in a time when most of the American workforce was blue-collar, but much of the Act applies to the largely white-collar salaried workforce of today, and its application to these jobs is still being worked out in the courts.

Employers have few places to go for protection from a wage-and-hour lawsuit.  Insurers have regarded wage-and-hour liability as largely an uninsurable risk because the incidences are perceived as resulting from deliberate and illegal acts, as opposed to negligence.  Despite recent evidence of negligence being the primary driver in many cases, most insurers seek to avoid covering this liability in their employment practices liability insurance (EPLI) policies. Employers are advised to develop compliance procedures regarding the FLSA, review the exemption status of each employee, and stress the importance of strictly following work-and-hour procedures in management training.


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