EPLI Wage and Hour Law Exclusion Bars Some, But Not All, Claims Pled in Employee Class Action for Labor Code Violations

In Southern Cal. Pizza Co., LLC v. Certain Underwriters, etc. (No. G056243, filed 8/27/19), a California appeals court held that an employment practices liability insurance (EPLI) policy exclusion for wage and hour or overtime laws barred coverage for certain statutory labor code violations, but not employee claims for expense reimbursement under the general employee indemnification law, Labor Code sections 2800 and 2802.

The owner of 250 Pizza Hut and Wing Street restaurants was sued in a class action for a variety of Labor Code violations, and filed a bad faith action when its EPLI insurer denied all coverage based on the wage and hour law exclusion, save for a $250,000 defense expense exception to the exclusion. In the bad faith action, the trial court sustained the insurer’s demurrer without leave to amend, agreeing that the wage and hour exclusion barred all coverage except for $250,000 in defense expense.

The appeals court reversed, holding that the wage and hour exclusion reached some, but not all, of the claims alleged. The policy excluded “any Claim based upon, arising out of, directly or indirectly connected or related to, or in any way alleging violation(s) of any foreign, federal, state, or local, wage and hour or overtime law(s), including, without limitation, the Fair Labor Standards Act.” The exclusion was subject to an exception for $250,000 in defense expense.

First, the court considered the meaning of “wage and hour law” to conclude that “’wage and hour . . . law(s)’ refers to laws concerning duration worked and/or remuneration received in exchange for work.”

The court focused on alleged violations of Labor Code 226, the wage statement statute. Section 226 lists nine items that employers must provide in writing to employees on payment of wages, including gross wages earned, hours worked, deductions, hourly rates, dates for which the employee is being paid, and the name and address of the legal entity that is the employer. (Lab. Code, § 226(a).) The statute also details the recourse available to an employee who believes his or her employer has not complied. The Southern Cal. Pizza court said that “[a]ll of these characteristics point toward the statute being a quintessential wage law,” and thus claims based upon them were barred by the exclusion.

However, the complaint also alleged claims for failure to reimburse delivery drivers for mileage, work travel-related costs and cell phone expenses under Labor Code sections 2800 and 2802. The court pointed out that neither of those statutes mentions wages or hours, nor are they found in the Labor Code chapters on compensation or working hours. Instead, the court characterized these as “business expense” claims, not barred by the wage and hour exclusion.

But the analysis did not end there, since the insurer argued that the business expense claims did not fall within the coverage grant in the first instance. The policy covered “Inappropriate Employment Conduct,” which included (1) “any failure to adopt, implement, or enforce employment related policies or procedures”; and (2) “any other employment related workplace tort.” The Southern Cal. Pizza court found coverage under the latter, saying that a tort is “any wrong, not consisting in mere breach of contract” and that claims under Labor Code sections 2800 and 2802 for failure to reimburse business expenses were not contract claims. Therefore those claims posed a potential for coverage as “employment related workplace torts.”

The Southern Cal. Pizza court went on to address the other statutory violations that had been alleged: failure to timely pay earned wages upon discharge (Lab. Code, § 201); failure to timely pay earned wages upon resignation (Lab. Code, § 202); unfair business practices (Bus & Prof. Code, § 17200); and, recovery of civil penalties under a private attorney general theory (Lab. Code, § 2698, et seq.). Plus, the court noted that certain allegations could be construed as misrepresentations, although not specifically pled as such. The court stated that: “Sections 201 and 202 are wage and hour laws, as we have interpreted that Policy term, and thus the wage and hour exclusion applies to them. The purported unpled misrepresentation claim would likewise fall within the exclusion. All of the allegations highlighted by plaintiff allege violations of state wage and hour laws (e.g. ‘falsely represented . . . they were properly denied wages’), so the unpled claim would be ‘directly or indirectly connected or related to’ those purported violations.”

But the Southern Cal. Pizza court reached a split decision on Business and Professions Code section 17200, saying that “[b]ecause the causes of action seeking relief under section 17200 and the Private Attorneys General Act are derivative claims based, in part, on defendant’s alleged failure to reimburse business-related expenses, we agree they are, to that extent, potentially within the scope of the Policy and not excluded.”

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September 26, 2019