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By October 24, 2018No Comments

501(c) Services would like to deepen our impact in the sector, and we understand how important employment practices are when it comes to protecting nonprofits. The objective of this article is to draw attention to a relevant coverage section that may exist in D&O/ Employment Practices Liability Insurance coverage forms so that California nonprofits are not losing budget dollars to losses that could have otherwise been entirely or partially insured. Understanding the full value of the insurance programs 501(c)(3) nonprofits secure is essential to their long-term success and impact.

Insurance does not typically cover losses attributed to violations of state or federal laws. However, Wage and Hour claims make for an interesting exception. Wage and Hour claims are those brought by an employee-plaintiff claiming that overtime was due and not paid, or that proper meal and rest breaks were not provided by the employer, or other issues regarding proper payment of compensation[1]. This dovetails with the issue of classifying hires as independent contractors (ICs) or employees. While ICs are not due overtime pay, employees are. Therefore, it’s worth addressing California Wage and Hour issues in light of the most recent Supreme Court ruling regarding classification of employees versus ICs.

Mis-classifying hires as ICs instead of as employees continues to be problematic in California. We can look to the recent Supreme Court decision DYNAMEX OPERATIONS WEST, INC., Petitioner, v. The SUPERIOR COURT OF LOS ANGELES COUNTY for guidance on how to best ensure we’re classifying hires correctly. The California Supreme Court recommends the ABC Test to determine if a hire is an Employee or an IC:

The ABC test presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if the hiring business demonstrates that the worker in question satisfies each of three conditions: (a) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and(b) that the worker performs work that is outside the usual course of the hiring entity’s business; and (c) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed. [2]

This applies to both the for-profit and non-profit sectors equally.

The right insurance program may provide protection in the case a mistake is made resulting in a Wage and Hour claim. An important question for your insurance broker and insurance program is: Are Wage and Hour claims against the nonprofit covered by your EPLI policy? Wage and Hour claims present a complex issue with respects to coverage forms and you would be wise to review your insurance program and ascertain what type of coverage may exist and what exactly it will pay for. This is especially true given that it is possible for insurance providers to successfully exempt Wage and Hour claims from coverage under EPLI policies. In the recent case of California Dairies, Inc. v. RSUI Indemnity Co. [3], the California Supreme Court upheld the following language as successfully excluding Wage and Hour claims from EPLI coverage:


The Underwriter shall not be liable under this Part 2 to make any payment for Loss in connection with any Claim made against the Insured:

  1. B) arising out of, based upon or attributable to any violation of any of the responsibilities, obligations or duties imposed by the National Labor Relations Act (including the Labor Management Relations Act of 1947), Fair Labor Standards Act (except the Equal Pay Act), Occupational Safety and Health Act, Consolidated Omnibus Budget Reconciliation Act of 1985, Worker Adjustment and Retraining Notification Act or any amendments to or rules, regulations or orders promulgated pursuant to these laws or similar provisions of any federal, state or local statutory or common law…

 Another relevant issue to this discussion is that of punitive or exemplary damages. Punitive or exemplary damages can be awarded under California law for conduct that is considered “malice or oppressive.” Pubic policy typically holds that insurance is not to pay for punitive or exemplary damages.[4] In the case of Wage and Hour claims, your insurer may cover the cost to defend such claims, but any punitive or exemplary claims built into the lawsuit may be problematic. It is also a question as to whether your state will allow your insurance policy to pay for any fines assessed and not just the cost to defend. It’s preferable that the state allows insurers to pay for fines from the perspective of the insured. If your carrier is prohibited from paying fines, then understand that the Wage and Hour limit your policy provides, if any, will only be available to pay attorneys to help you resolve the matter. That’s the case in California. You’ll be on the hook for penalties. These are important risk factors for management to be mindful of when considering the total cost of their risk.

EPLI coverage is a must for every employer and Wage & Hour claims are an important – often overlooked – coverage part that could have significant implications for a nonprofit employer.


This article is provided as general advice and information, and should not be construed as legal advice. Neither the 501(c) Agencies Trust, 501(c) Services nor 501(c) Insurance Programs, Inc. (collectively 501) guarantees that the information herein is complete or correct, and 501 disclaims all liability with respect to actions taken or not taken based on the contents of this article. Pleased consult licensed legal counsel in your state.





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