It has long been acknowledged that typical Employment Practices Liability Insurance (EPLI) policies exclude coverage for “wage and hour” claims.[1] [2]  However, a recent California Court of Appeal decision, Southern California Pizza Co., LLC v. Certain Underwriters at Lloyd’s, London Subscribing to Policy Number 11EPL-20208,[3] narrows the definition of what is a wage and hour claim, and improves the possibility of obtaining coverage for broad-brush wage and hour claims that tack on claims for failure to reimburse employees for business-related expenses.

In Southern California Pizza, the Court of Appeal held that claims brought under California Labor Code Sections 2800 and 2802 for failure to reimburse employee expenses did not fall within the wage and hour exclusion in a Lloyd’s of London EPLI policy that excluded coverage for claims “based upon, arising out of, directly or indirectly connected to or related to, or in any way alleging violations of any foreign, federal, state, or local, wage and hour or overtime law(s), including, without limitation, the Fair Labor Standards Act.”  In doing so, the Court reversed the lower court’s dismissal of the insured’s coverage case and rejected prior federal court decisions that had denied coverage for Labor Code Sections 2800 and 2802 claims under similar exclusionary language, stating that the California Courts of Appeal are “not bound by those federal decisions, nor do we find them persuasive.”[4]

Accordingly, policyholders who previously would not have had coverage for these types of reimbursement-related claims may now be able to trigger an insurer’s broad defense obligations and also obtain indemnification for some claims, depending on the language of their EPLI policy.

1. Prior to Southern California Pizza, courts were split on the interpretation of Labor Code Section 2802 for EPLI coverage purposes

In deciding definitively that Section 2802 falls outside the wage and hour exclusion of the Lloyd’s policy, the Court of Appeal recognized that three federal district decisions had previously reviewed similar exclusionary provisions and had addressed this coverage question inconsistently.[5]

(a) Kay

In Kay, the court undertook intellectual gymnastics to find that Section 2802 was a “wage and hour law” for purposes of finding the wage and hour exclusion barred coverage for a delivery person’s lawsuit alleging numerous Labor Code violations, including failure to provide “reimbursement for business expenses.”[6]  The court acknowledged that Section 2802 did not explicitly “touch on wages paid or hours worked,” nor did it fall within Division 2 of the Labor Code “which contains the minimum wage, overtime, rest period, payment timing, and record-keeping provisions.”[7]  Instead Section 2802 fell under Division 3 (Employment Relations).

Despite this, the court in Kay held that Section 2802 was a “wage and hour law,” finding instructive that it was often “paired with the Division 2 sections . . . in actions against employers who allegedly underpay their employees, without distinguishing the business claim expense.”[8]  The court further determined that Section 2802 “parallels the function of the minimum wage and other wage and hour laws – they all prevent employers from offloading expenses onto their employees . . . .”[9]

(b) Phase II

Building off the reasoning in Kay, as well as a series of California state court cases addressing reimbursement for employee uniforms, the court in Phase II found that Section 2802 was a “wage and hour law” for purposes of a policy exclusion similar to that in Southern California Pizza.  In Phase II, an employer brought an action against its insurer seeking reimbursement for costs incurred in defending an employee lawsuit arising out of numerous alleged violations of the Labor Code, including Section 2802, stemming from the employee’s misclassification as an independent contractor.

In finding that Section 2802 dealt with wages, the court found the reasoning in the employee uniform cases to be analogous.  Those cases found broadly that reimbursement for uniforms was “compensation” and “concerns wages.”[10]  In particular, the court held that the “rationale” of In re Work Uniform Cases[11] “applies equally to all Section 2802 reimbursement claims.”[12]  The court in Work Uniform held that “payment to employees for work uniforms is part of the employees’ compensation and should be considered like any other payment of wages, compensation or benefits.”[13]

(c) Hanover

By contrast, the court in Hanover[14] held that there was coverage for failure to reimburse claims arising under Section 2802 because the exclusion at issue was narrow and did not specifically exclude reimbursement claims.  In that case, the court determined that Section 2802 is not a wage and hour law because not only does it have functions other than “prevent[ing] employers from offloading expenses onto their employees,” but the indemnification clause in Section 2802 is “not tied to hours worked or wages paid.”[15]  In fact, claims under Section 2802 had not been definitively established as excluded wage and hour claims by California Courts of Appeal.  Thus, the court in Hanover held that the possibility that the claim may not fall within the wage and hour exclusion required the insurance company to defend the policyholder.[16]

2. Southern California Pizza delivers the possibility of broader coverage under EPLI policies for actions stemming from failure to reimburse business-related expenses

Southern California Pizza resolves the federal court split in the insureds’ favor, establishing that, as a matter of California law, Sections 2800 and 2802 claims are not barred under a wage and hour exclusion that purports to bar coverage only for wage and hour or overtime law(s).[17]  The Court emphasized the text of the policy and ultimately drew its support from what it described as the first key step to interpreting an insurance policy, which is to address the ordinary meaning of the term.[18]

The Court then acknowledged that Section 2800 indicates that “an employer shall in all cases indemnify his employee for losses caused by the employer’s want of ordinary care” and Section 2802 provides, in part, that “an employer shall indemnify his or her employee for all necessary expenditures or losses incurred . . . in direct consequence . . . of his or her duties . . . .”[19]

Further, neither Section 2800 nor Section 2802 mentions wages or hours or appears in those parts of the Labor Code titled “compensation” or “working hours.”[20]  In addition, the Court noted that the function of Section 2800 was to permit disbursements for losses and work-related expenditures and that the function of Section 2802 was to protect employees from an employer’s lack of reasonable care and diligence.[21]  Thus, the Court held that the ordinary meaning of Sections 2800 and 2802 was distinct from that of “wage” and “hour” and fell outside the scope of the wage and hour exclusion.[22]

However, the Court did find that Labor Code Section 226, the wage statement statute, is a “wage and hour law” within the meaning of the wage and hour exclusion.[23]  In coming to this conclusion, the Court relied upon Heritage Residential Care, Inc. v. Division of Labor Standards Enforcement,[24] which found that the Legislature enacted Section 226 “[a]s part of a comprehensive statutory scheme governing the payment of wages.”  The Court also found that Labor Code Sections 201 and 202 are “wage and hour laws” and thus the wage and hour exclusion applied to them.[25]

The holding in Southern California Pizza resolves a district court split; makes clear that courts should analyze the ordinary meaning of the “wage and hour law” at issue; and confirms that Labor Code Sections 2800 and 2802 are not “wage and hour laws” for purposes of a typical wage and hour exclusion.  Still, questions of coverage always turn on the specific exclusionary language at issue, and it is likely that insurers will react to this decision by broadening the language of their wage and hour exclusions to specifically carve out coverage for reimbursement expenses.

Policyholders should carefully analyze their EPLI policy’s exclusionary language and remain vigilant in seeking coverage for all employee-related disputes where the allegations fall outside of the typical “duration worked and/or remuneration received in exchange for work” and, as a result, outside of the wage and hour exclusion.[26]

[1] Houston Cas. Co. v. Great Am. Chicken Corp., Inc., 2019 U.S. Dist. LEXIS 142281 (C.D. Cal. Aug. 12, 2019) (holding that a wage and hour endorsement in an EPLI policy precluded coverage for actions alleging violations of Labor Code Sections 226, 2802, and 1174); E.H. Summit, Inc. v. Carolina Cas. Ins. Co., 2016 WL 7496142 (C.D. Cal. 2016) (holding that a wage and hour exclusion in an EPLI policy precluded coverage for a “run-of-the-mill wage and hour lawsuit”); Gauntlett v. Ill. Union Ins. Co., 2012 WL 4051218 (C.D. Cal. 2012) (finding no coverage for wage and hour claims under an EPLI policy).
[2] Some insurers will offer wage and hour defense costs-only coverage endorsements for a hefty premium.
[3] No. 30-2017-00940309, 2019 WL 4572859, at *6–*7 (Cal. Ct. App. Aug. 27, 2019).
[4] G056243, 2019 WL 4572859, at *6.
[5] These are: (1) Admiral Ins. Co. v. Kay Auto. Distributors, Inc., 82 F. Supp. 3d 1175 (C.D. Cal. 2015); (2) Phase II Transp., Inc. v. Carolina Cas. Ins. Co., 228 F. Supp. 3d 999 (C.D. Cal. 2017); and (3) Hanover Ins. Co. v. Poway Acad. Of Hair Design, Inc., No. 15cv536 BTM (DHB), 2016 U.S. Dist. LEXIS 158041 (S.D. Cal. Nov. 14, 2016).
[6] 82 F. Supp. 3d at 1177.
[7] Id. at 1181.
[8] Id. at 1181–82.
[9] Id. at 1182.
[10] 288 F. Supp. 3d at 1005.
[11] 34 Cal. Rptr. 3d 635 (Cal. Ct. App. 2005).
[12] Id.
[13] Work Uniform, 34 Cal. Rptr. 3d at 643.
[14] No. 15cv536 BTM (DHB), 2016 U.S. Dist. LEXIS 158041, at *12.
[15] Id. at *12.
[16] Id. at *13.
[17] S. Cal. Pizza Co., 2019 WL 4572859, at *1.
[18] Id. at *6.
[19] Id. at *5.
[20] Id.
[21] Id.
[22] Id. at *6–*7.
[23] Id. at *5.
[24] 120 Cal. Rptr. 3d 363, 366–67 (Cal. Ct. App. 2011).
[25] S. Cal. Pizza Co., 2019 WL 4572859, at *8.
[26] Id. at *4.