Employers face numerous federal laws that govern the employment relationship. These laws, such as Title VII of the Civil Rights Act, the Family and Medical Leave Act, and the Americans with Disabilities Act, impose requirements on employers regarding the manner in which they interact with their employees. If these requirements are overlooked, employers can expect to be called upon to pay a potentially substantial damage award to the aggrieved employee. While avoiding a violation of all applicable employment laws is the goal of every organization, there is one law which employers should be concerned about above the others—the Fair Labor Standards Act.

The Fair Labor Standards Act (FLSA) is the federal law that establishes the minimum wage and that governs the payment of overtime compensation. Its broad applicability, the manner in which it was drafted, and its complex and highly technical requirements, make it one of the most feared federal employment laws. The significance of potential FLSA violations has only increased since the economy began taking a turn for the worse because the ever-increasing number of laid-off employees has served to increase the number of potential plaintiffs.

The FLSA has been described as the perfect plaintiff’s law. Consider that in most cases, the FLSA’s attorney’s fee provision operates to only benefit the employee. Under the FLSA, an employer who successfully defends an employee’s claim is typically not entitled to an award of attorney’s fees. The FLSA also allows a single employee to file a lawsuit on behalf of all similarly situated employees. Under the FLSA’s collective action provision, the burden a plaintiff must satisfy before being authorized to notify all potential class members is relatively low. This means that an employer may be faced with the prospect of defending a collective action involving dozens, or even hundreds, of current and former employees.

In addition to the procedural benefits afforded employees under the FLSA, the complexity of the law itself serves to increase the level of concern faced by employers. Unlike laws that prohibit discrimination or harassment, which are relatively easy to understand, the FLSA is replete with complex and technical provisions which, in many cases, are counterintuitive. For example, when does the amount of time an employee spends on a break constitute hours worked? If an employee is compensated at two or more different rates, how is the overtime calculated? When can an employer make salary deductions without jeopardizing the employee’s exempt status? If an employee violates company policy and works overtime without permission, does the employer have to pay the employee overtime? In many cases, the answers to these questions cannot be obtained by relying on common sense. So, in addition to being relatively plaintiff-friendly from a procedural standpoint, the FLSA’s complex and highly technical nature increases the likelihood of a violation.

Given the confluence of these factors, it should not be surprising to discover that literally thousands of lawyers and law firms have developed a niche practice involving nothing more than filing lawsuits under the FLSA. These firms seek out recently laid-off employees for the purpose of putting their former employer’s compensation practices under a microscope. And in most cases, the employer’s attorney will likely recommend settling the lawsuit as soon as possible.

Electing to settle the lawsuit early is virtually predetermined by the FLSA itself. In most cases, the employee will be entitled to a relatively small amount of unpaid wages. The real evil lurking behind the lawsuit is the attorney’s fees. Almost immediately after filing the lawsuit, the amount of attorney’s fees that the employee will be entitled to receive from the defendant-employer likely dwarfs the amount that may have been due the employee under the FLSA. This amount does not include the amount the employer will have to pay its own attorney. From a purely economic standpoint, it makes more sense to settle the case early for $10,000 and be done with it, than it does to litigate the case by paying at least twice that amount for the employer’s own attorney, and still face the prospect of having to pay the employee’s damages plus the employee’s attorney’s fees. Thus, the most common course of action is to settle the lawsuit, even if the employer has a valid defense to the employee’s allegations.

These reasons, coupled with the surge in lawsuits brought under the FLSA, compelled many insurance companies to exclude claims brought under the FLSA from standard employment practices liability insurance (EPLI) policies. Since the numbers simply did not support insuring against FLSA claims, FLSA exclusions found their way into virtually every EPLI policy.

However, some insurance companies are beginning to offer defense coverage for FLSA claims in their EPLI policies once again. Although the coverage may be subject to a sub-limit, some coverage is being provided nonetheless, oftentimes at very reasonable premium rates. By purchasing this coverage, employers no longer need to be held hostage by the plaintiff-friendly FLSA. The existence of such coverage gives employers, through their insurance company, the option of actually defending against such claims rather than being forced by the economies to settle. In the current economy, no amount of money is considered disposable, and by obtaining an EPLI policy that offers coverage for FLSA claims, employers no longer have to feel compelled to buy their way out of a lawsuit brought under the FLSA.

If you would like to learn more about obtaining an employment practices liability insurance policy to insure against FLSA claims, contact us.