No Wage and Hour Exclusion for Employees’ Business Expense Claims

By Kevin F. Kieffer, Monique M. Fuentes and James A. Hazlehurst © Troutman Sanders Nov 29, 2016

In Hanover Ins. Co. v. Poway Academy of Hair Design, Inc., the U.S. District Court for the Southern District of California recently held that claims for violation of California Labor Code Section 2802, which among other things, requires employers to reimburse employees for reasonable business expenses, do not fall within an insurance policy's wage and hour exclusion. The insurer, therefore, had a duty to defend against the claims.

The insurer issued two "employment practices liability insurance" policies to a group of insured beauty salons. Both policies contained a wage and hour exclusion which precluded coverage for "[a]ny violation of any responsibilities, obligations, or duties imposed by a federal, state or local statutory or common law … that governs wage, hour and payroll policies and practices, except the Equal Pay Act."

However, one of the insurance policies had a wage and hour endorsement, which provided that the insurer would defend wage and hour claims up to $25,000, but had no duty to indemnify against such claims.

The insureds' employees filed a class action alleging six claims against the insureds. The insurer defended against the claims under the wage and hour endorsement but subsequently filed an action against the insureds for declaratory judgment and reimbursement of defense costs in excess of $25,000.

The insurer and insureds agreed that five of the six claims against the insureds were for violations of wage and hour laws. However, they disputed whether the employees' claims for violation of California Labor Code Section 2802 for the insureds' alleged failure to reimburse the employees for certain expenditures for beauty products and tools constituted a wage and hour violation. The insurer moved for summary judgment.

The court in Hanover noted that there was an "absence of clear California authority" on whether Section 2802 is a wage and hour statute.

A 2015 case from the Central District of California, Admiral Insurance Co. v. Kay Automotive Distributors, Inc., 82 F. Supp. 3d 1175 (C.D. Cal. 2015), concluded that Section 2802 was a wage and hour statute, reasoning that "[t]he function of § 2802 parallels the function of the minimum wage and other wage and hour laws—they all prevent employers from offloading expenses onto their employees, whether by wage theft or by failing to reimburse them for business costs." Id. at 1182.

However, the court in Hanover determined that it was not bound by the Admiral Insurance decision and chose to depart from its holding.

Additionally, a 2005 California Court of Appeal case, In re Work Uniform Cases, 133 Cal. App. 4th 328 (2005), held that payment for work uniforms under Section 2802 should be considered like any other payment of wages or compensation.

However, the court in Hanover concluded that the Work Uniform decision did not go so far as to hold that Section 2802 constitutes a wage and hour statute. The court in Hanover explained that Section 2802 also served other functions, like requiring employers to indemnify employees sued by a third-party for the employee's conduct in the course and scope of employment.

The court in Hanover ultimately held that when taking this separate function of Section 2802 into account, the statute was not a wage and hour law and not subject to the wage and hour exclusion and endorsement.

The court further reasoned that, because California appellate courts had not definitively determined whether Section 2802 was a wage and hour law, "there is at least a real possibility that it is not excluded and therefore covered."

Accordingly, the court denied the insurer's motion for summary judgment, concluding that the insurer had a duty to defend the claims for alleged violation of Section 2802.

Kevin F. Kieffer, Monique M. Fuentes and James A. Hazlehurst are attorneys with Troutman Sanders in Orange County, Calif.  © Troutman Sanders. All rights reserved. Reposted with permission.

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