In the following guest post, Kelly Johnson of Hiscox USA and James Talbert and Elan Kandel of Bailey Cavalieri took a look at a recent judicial decision addressing the question of whether a wage and hour claim represents an employment related misrepresentation within the meaning of an Employment Practices Liability Insurance policy. I would like to thank Kelly, James, and Elan for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Kelly, James and Elan’s article.
Employment practices liability policies (EPL Policies) are written on a “named peril basis.” In other words, coverage is limited to an enumerated list of hazards or “perils.” Usually, EPL policies cover a dozen or so categories of employment-related perils, including, for example, claims of sexual harassment, wrongful discharge, and retaliation. The list of covered perils does not normally include wage and hour claims (to obtain coverage for those claims, policyholders typically must purchase additional coverage). However, given the breadth of the wording for some of the enumerated perils, coverage litigation has often ensued when policyholders and insurers have disagreed about application of certain enumerated perils to wage and hour claims. In view of the prevalence of wage and hour claims in California, in particular, it comes as no surprise that California is also a hotbed of wage and hour coverage litigation.
Most recently, the district court in United Farm Workers of America v. Hudson Ins. Co., was the latest court to address the question of wage and hour coverage. There, United Farm Workers of America (UFW) was insured under a labor professional liability insurance policy, which was issued by Hudson Insurance Company (“Hudson”). The policy included an EPL endorsement, which provided, in relevant part, that Hudson would pay, on behalf of UFW, “all Loss for which [UFW] becomes legally obligated to pay resulting from . . . a Wrongful Employment Practice.”
Wage and hour claims were not included in the definition of “Wrongful Employment Practice” and, therefore, were not within the policy’s scope of coverage. However, the term “Wrongful Employment Practice” did include, among other things, claims for employment related misrepresentation. UFW sought coverage for the underlying lawsuit on the basis that, among other things, the underlying lawsuit did allege a Wrongful Employment Practice, because it included allegations that UFW failed to provide complete and accurate wage statements under California’s Labor Code. Specifically, UFW contended that the operative complaint in the underlying lawsuit “alleged affirmative misrepresentation of wages and other compensation owed to Cerritos . . . and those alleged misrepresentations were a legal element of the claims against UFW.” As such, UFW asserted that the underlying lawsuit included a claim based on “employment related misrepresentation” (i.e. a covered peril under the policy issued to it by Hudson). Therefore, according to UFW, “[b]ecause misrepresentation, including concealment and intentional deceit[,] formed the basis of one of the [amended complaint’s] claims, actual coverage for the claim existed under the Policy.”
The court rejected UFW’s argument that an inaccurate wage statement claim represented a claim premised on employment related misrepresentation. Instead, the court found that the underlying lawsuit related to wage and hour violations and that misrepresentation was not an element in any of the causes of action contained therein. In reaching this result, the court relied on an earlier decision issued by a district in 2009: California Dairies, Inc. v. RSUI Indem. Co. There, the policyholder (California Dairies) was sued by employees who alleged that they were denied mandated meal periods, rest periods, reimbursement for employee uniforms, and wages due at termination. California Dairies’ D&O insurer denied coverage based on an exclusion for claims “brought by or on behalf of any Insured” (the wage and hour claim at issue there was, in fact, brought by an insured). However, that exclusion contained a carve-out for, among other things, “actual or alleged employment related misrepresentation.” California Dairies made a similar argument to the one UFW makes in the instant case. According to California Dairies, claims that “employees were denied mandated meal periods, rest periods, reimbursement for employee uniforms, and wages due at termination . . . ‘reflect employment misrepresentations to employees that Plaintiff would comply with the law regarding such benefits,’ and/or ‘involve a failure to enforce adequate or consistent organizational polices relating to employment.’” The California Dairies court held, and the Ninth Circuit agreed, that:
[The insured’s] assertion that [California Labor Code] violations alleged in the [underlying] complaint should be viewed as “employment-related misrepresentations” is a strained interpretation of the Policy language in light of the facts presented. The [underlying] action is limited to allegations based upon the failure to pay wages and related benefits. The [underlying]complaint does not allege any misrepresentations by [the insured], nor is misrepresentation a required element of any of the [underlying] causes of action, all of which relate to wage and hour conditions of employment.
As in California Diaries, the UFW court held that misrepresentation and deceit were not elements of any of the underlying causes of action identified in the underlying complaint, including allegations that UFW failed to provide complete and accurate wage statements. Accordingly, the court refused to construe any of the allegations in that lawsuit as claims of “employment-related misrepresentation.” The court therefore determined that the underlying lawsuit did not allege any Wrongful Employment Practice. As a result, the court found that the Policy did not afford coverage for the Underlying Lawsuit.
UFA builds on a line of California cases recognizing that inaccurate wage statement claims constitute “quintessential wage and hour allegations,” and rejecting insureds’ attempt recast them as claims of “employment-related misrepresentation.” So far, several federal courts in California have recognized this as an artificial attempt to either shunt wage and hour claims into a policy’s scope of coverage, or to extricate such claims from the scope of an exclusion. In the wake of UFA, insurers have a stronger basis to foreclose insureds from recasting (uncovered) wage and hour claims as (covered) employment related misrepresentation claims—at least if the wage and hour claim does not include misrepresentation as an element of the cause of action. Outside of California, UFA provides a well-reasoned precedent that may be employed for persuasive effect in other jurisdictions throughout the country (almost none of which have considered whether wage and hour claims may be recast as claims of employment-related misrepresentation, and thereby brought within the scope of an EPL policy’s coverage and/or immunized from wage and hour exclusions).
 Case No. 1:18-cv-0134, 2019 U.S. Dist. LEXIS 60257 (E.D. Cal. Apr. 5, 2019).
 Id. at *2 (emphasis added).
 Id. at *40.
 Cal. Dairies, Inc. v. RSUI Indem. Co., 617 F. Supp. 2d 1023 (E.D. Cal. 2009).
 Id. at 1049.
 Id. at 1050; 2011 U.S. App. LEXIS 25653, at **3-4 (9th Cir. Dec. 21, 2011).
 See Cal. Dairies, Inc., 617 F. Supp. 2d, at 1050 (E.D. Cal. 2009); E.H. Summit, Inc. v. Carolina Cas. Ins. Co., 2016 U.S. Dist. LEXIS 195667, at **18-19 (C.D. Cal. Feb. 24, 2016) (recognizing inaccurate wage statement claims as “quintessential wage and hour allegations;” rejecting an insured’s attempt to recharacterize such claims as misrepresentation claims where the only purported misrepresentation is derivative of other wage and hour violations); see also Admiral Ins. Co. v. Kay Auto. Distribs., 82 F. Supp. 3d 1175, 1182 (C.D. Cal. 2015) (observing that a misrepresentation claim which arises directly out of the wage and hour laws is subject to an exclusion for claims “based on” or “arising out of” the wage and hour laws).