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Joe Balice Law360 Expert Analysis: Calif. Plaintiffs’ New Toy In Employment Litigation

New York (November 08, 2013, 12:48 PM ET) — In October 2013, California Gov. Jerry Brown signed into law a new bill that will require California employers to provide their employees with a “recovery period:” a “cooldown period afforded an employee to prevent heat illness.” Exactly when employers will be required to provide these recovery periods will be outlined in the enacting regulations.

For example, California Division of Occupational Safety and Health’s existing regulations currently mandate, “Employees shall be allowed and encouraged to take a cooldown rest in the shade for a period of no less than five minutes at a time when they feel the need to do so to protect themselves from overheating.”

The law recently passed by the state Legislature gives recovery periods the same protections as meal and rest breaks under the Labor Code: employers who fail to provide recovery periods must pay the employee for an additional hour of work.

Litigation regarding an employer’s failure to provide recovery periods is sure to follow and, depending on how the applicable regulations are framed, expects to be fact-intensive and messy. For example, the Cal/OSHA regulation above requires a break whenever the employee “feels the need to do so.” If that standard is enforced through the new statutory remedy recently signed into law, employers face significant liability if they fail to give their employees absolute discretion on how often and how many recovery periods are taken.

In other words, the plaintiffs’ bar has a new toy. On the other hand, employer victories in California Supreme Court cases on meal and rest breaks in Brinker Rest. Corp. v. Superior Court (employers need only “provide,” but not require, meal and rest breaks) and Kirby v. Immoos Fire Protection (plaintiffs’ attorneys’ fees are not recoverable for meal and rest break claims) may diminish the number and severity of claims resulting from the new law.

One important development to monitor is how employment practices liability insurance (EPLI) carriers will respond to recovery-period claims. EPLI protects employers from claims and lawsuits by their employees (except for injury-related claims, which are the exclusive jurisdiction of workers’ compensation).

Many employers are surprised to learn how limited EPLI can be in responding to certain types of employee claims. While most policies cover garden-variety wrongful termination, discrimination and harassment claims, EPLI carriers typically don’t cover wage and hour claims. In fact, any claim that even marginally resembles a failure to pay an employee money due is routinely flagged as wage and hour, and coverage is denied (even if the claim is not really a claim for failure to pay wages for hours worked).

Understanding how and why carriers reach this conclusion sheds some light on what employers can expect with respect to coverage for the new recovery-period claims.

Employers and defense attorneys know that when employees sue their employers, they rarely assert only one kind of claim. Complaints usually include a potpourri of Labor Code violations including failure to pay overtime; pay minimum wage; provide meal and rest breaks; indemnify for workplace expenses; provide accurate wage statements; and provide all compensation upon termination.

The potpourri will soon include failure to provide recovery periods. Although many carriers label the aforementioned as wage and hour, each claim requires its own evaluation under the insurance policy.

Historically, EPLI carriers have denied coverage for these wage and hour claims on two grounds. First, carriers often contend that allegations of employer violations do not constitute claims of wrongful employment practices, a prerequisite for coverage.

Typical EPLI policies define “wrongful employment practices” to include a variety of enumerated offenses (again, wrongful termination, harassment, discrimination, etc.), and if the particular claim at issue doesn’t fit into one of those categories, then the claim is not a wrongful employment practice and thus not covered.

That list of offenses usually includes the “failure to adopt, implement or enforce employment related policies or procedures” (or something substantially similar). One would think that a failure to provide meal and rest breaks or indemnify for workplace expenses involves an employment related policy or procedure, but carriers say no, relying on the Ninth Circuit’s decision in California Dairies Inc. v. RSUI Indemnity Co.

Policyholders have long contended that insurance carriers’ reliance on the California Dairies decision for this principle is suspect as the policy at issue in that case had an atypical definition covering the “failure to provide or enforce adequate or consistent organization policies or procedures relating to employment.” Both the U.S. District Court for the Eastern District of California and the Ninth Circuit noted that that these kinds of claims don’t involve any “organizational policies.”

As noted, this is an unusual policy term — very few other EPLI policies include that organization element in their definition. Further, most plaintiff’s attorneys now load their complaints with allegations expressly contending that employers have failed to implement and enforce adequate employment policies and procedures.

It’s unclear how a carrier’s argument that such a complaint fails to allege a wrongful employment practice would hold up before the California Supreme Court, the California Dairies decision notwithstanding.

Second, carriers typically argue that these kinds of claims are barred by the Fair Labor Standards Act exclusion that is found in all EPLI policies barring coverage for “violation of any of the responsibilities, obligations or duties imposed by … the Fair Labor Standards Act … any rules or regulations of any of the foregoing promulgated thereunder and amendments thereto or any similar provision of federal, state or local statutory law or common law.”

Insurance companies contend that the California Labor Code provisions at issue in the wage and hour claims are “similar” to the FLSA and that the claims are therefore excluded from coverage. Again, the authority for this purported rule is the California Dairies case.

Importantly, however, it is the district court’s decision, which was vacated and rendered dicta by the Ninth Circuit that decided the case on other grounds and did not reach the question of the FLSA exclusion, which addressed this particular issue. Even still, the district court’s decision in California Dairies ruled that some of these so-called wage and hour claims are not similar to anything in the FLSA, and the exclusion does not apply.

Furthermore, the district court’s conclusion that these Labor Code provisions are similar to the FLSA is suspect. For example, even though the district court in California Dairies ruled that the meal and rest break claims are similar to the FLSA, the United States Department of Labor website expressly states that “the FLSA does not require … meal or rest periods, holidays off or vacations.”

Policyholder advocates contend that the ruling is ripe for being overturned by the California Supreme Court. Nevertheless, carriers routinely assert this exclusion as a coverage defense to claims arising under the California Labor Code.

Thus, when these new recovery-period claims start trickling (or rushing) in over the next several years, the response from EPLI carriers will be predictable. Even though plaintiffs’ attorneys are sure to frame their complaints with express language regarding the failure to implement adequate workplace policies and procedures and the fact that the FLSA says nothing about recovery periods or heat illness, EPLI carriers are still likely to deny coverage for recovery-period claims based on the same grounds they asserted with respect to meal and rest break and similar wage and hour claims: the purported absence of employment wrongful acts and the FLSA exclusion.

The validity of these coverage defenses is questionable, and employers must consult legal counsel to determine whether a basis for coverage exists under their EPLI policies.

–By Joseph G. Balice, BG Law LLP

Joseph Balice is an associate in the firm’s Los Angeles office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

All Content © 2003-2013, Portfolio Media, Inc.

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