California Appellate Court Rules that “Wage-and-Hour” Exclusion Does Not Bar Coverage for Employee Expense Reimbursement Claims

California Appellate Court Rules that “Wage-and-Hour” Exclusion Does Not Bar Coverage for Employee Expense Reimbursement Claims

A.      Summary 

In late 2019, a California appellate court ruled in a published decision, Southern California Pizza Co., LLC v. Certain Underwriters at Lloyd’s, London, 40 Cal. App. 5th 140 (Cal. Ct. App. 2019), that a wage-and-hour exclusion in an Employment Practices Liability Insurance (“EPLI”) policy did not bar defense coverage for claims that the insured failed to reimburse employees for work-related expenses. 

B.      Facts 

The insured, Southern California Pizza Co. (“SCPC”), owns and operates over 250 Pizza Hut and Wing Stop restaurants. Employees of SCPC filed a class action lawsuit, alleging that SCPC failed to reimburse delivery drivers for mileage expenses, work travel-related costs, and cell phone expenses. SCPC tendered the lawsuit to its EPLI insurer, Certain Underwriters at Lloyd’s, London (“Underwriters”). Underwriters denied indemnity coverage for the lawsuit, contending that the alleged violations fell within the policy’s wage-and-hour exclusion. That exclusion, however, provided for a $250,000 sublimit for the defense of wage-and-hour claims. Underwriters therefore agreed to defend, subject to that $250,000 sublimit.  SCPC sued Underwriters for breach of contract and bad faith, alleging it was entitled to more coverage. Underwriters demurred to the complaint, contending, inter alia, that all of the employment claims fell within the wage-and-hour exclusion. SCPC conceded that the wage-and-hour exclusion applied to some of the claims, but not all of them, and that coverage, therefore, was not limited to the $250,000 defense sublimit. The trial court sustained Underwriters’ demurrer. The appellate court reversed. 

C.      The appellate court’s holding 

The wage-and-hour exclusion at issue provided: 

This Policy does not cover any Loss resulting from 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; however, we will pay Defense Costs up to, but in no event greater than $250,000 for any such Claim(s), without any liability to us to pay such sums that any Insured shall become legally obligated to pay. 

The appellate court ruled that this exclusion did not apply to the employee reimbursement claims brought against SCPC under Cal. Labor Code §§ 2800 and 2802. These sections require an employer to indemnify an employee for all necessary expenditures or losses incurred by the employee in the direct consequence of the performance of his or her duties.  

In determining that the wage-and-hour exclusion did not apply, the appellate court noted that neither statute mentions “wages” or “hours.” Nor does either statute appear in the parts of the Labor Code titled “compensation” or “working hours.”  

The appellate court also noted that the policy did not define the term “wage.” The appellate court thus looked to definitions of the word, found in dictionaries, to determine its “ordinary and popular sense.” Merriam-Webster defines “wage” as “a payment usually of money for labor or services usually according to contract and on an hourly, daily, or piecework basis.” The Oxford English Dictionary defines it as “[a] payment to a person for service rendered.” Applying these ordinary definitions of “wage,” the appellate court reasoned that employer reimbursements of work-related expenditures are not payments made in exchange for labor or services. The employment reimbursement claims were thus not “wage” claims.  

The appellate court further reasoned that the purpose of the sections 2800 and 2802 are not to ensure compensation for labor or services rendered, but to prevent employers from passing their operating expenses on to their employees.Further, the appellate court cited a California Supreme Court decision, Smith v. Rae-Venter Law Group, 29 Cal. 4th 345, 353 (Cal. 2002), superseded by statute on other grounds as stated in Sampson v. Parking Service 2000 Com. Inc., 117 Cal.App.4th 212, 220 (Cal. Ct. App. 2004)), which characterized employee reimbursement claims as “non wage” claims.  

Notably, the Southern California Pizza court rejected Underwriters’ reliance on two insurance decisions, Admiral Ins. Co. v. Kay Automotive Distributors, Inc., 82 F. Supp. 3d 1175, 1181-82 (C.D. Cal. 2015), and Phase II Transportation, Inc. v. Carolina Casualty Ins. Co., 228 F. Supp. 3d 999, 1006 (C.D. Cal. 2017), involving similar wage-and-hour exclusions, in which federal district courts ruled that section 2802 is a wage-and-hour law. The Southern California Pizza court noted that it was neither bound by those federal decisions, nor did it find them persuasive. The Admiral court had concluded that section 2802 is a wage-and-hour law because: (1) it is often paired with minimum wage and overtime claims in lawsuits brought by employees, (2) courts often describe such lawsuits as “wage-and-hour” lawsuits, without distinguishing section 2802 as a business expense claim. The Southern California Pizza court did not find Admiral persuasive because Admiral did not address the ordinary meaning of the term “wage and hour law,” which is a key first step in the interpretation of an insurance policy. The Southern California Pizza court found that Phase II likewise skipped that analytical first step. 

D.      Practical implications 

The main “take-away” from this case is that California courts continue to construe exclusions narrowly, against insurers and in favor of coverage. Insurers who wish to exclude coverage for certain risks need to phrase exclusions in clear and precise language, which leaves no room for doubt or ambiguity.   

The Southern California Pizza court also emphasized that, in construing an insurance policy, California courts will read its provisions in their “ordinary and popular sense,” as a “layperson” would, not as how “they might be analyzed by an attorney or an insurance expert.” Thus, even if an employment law attorney or insurance specialist might consider an employee expense reimbursement claim to be a “wage-and-hour” claim, that is not necessarily how a layperson would understand it, and it is a layperson’s understanding that generally governs.   

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