In a potentially beneficial decision for employers, a California appellate panel ruled that the term “wage and hour … law” in an insurance policy’s exclusion was limited to laws “concerning duration worked and/or remuneration received in exchange for work.”

Southern California Pizza Company owns and operates 250 Pizza Hut and Wing Street restaurants. It purchased an employment practices liability insurance policy from Lloyd’s of London, which provided coverage for “employment events.”

The policy also featured an exclusion, which read: “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 to, 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).”

A group of employees filed a putative class action against the employer alleging a variety of Labor Code provisions. Southern California Pizza tendered the suit to the insurer, which denied coverage based on the wage and hour exclusion. It did provide $250,000 in defense costs.

The employer filed suit seeking a declaratory judgment that it was entitled to coverage. Siding with the insurer, the trial court held that all causes of action in the underlying employment lawsuit fell within the scope of the exclusion.

On appeal, the panel adopted a narrower reading of the exclusion, finding that the employer was entitled to coverage for some of the claims.

As the policy itself did not define the term “wage and hour … law(s),” the court considered dictionary definitions and the ordinary meaning of the term to conclude that the phrase “refers to laws concerning duration worked and/or remuneration received in exchange for work.”

Applying this interpretation, the court found that the underlying lawsuit’s claim that the employer failed to include all required information on wage statements provided to its employees fell within the policy exclusion.

The employees specifically alleged a violation of section 226 of the Labor Code, within a chapter titled “Payment of Wages,” which lists nine items that employers generally must provide in writing to employees each time wages are paid. This section was enacted by the California State Legislature as “part of a comprehensive statutory scheme governing the payment of wages,” the court explained.

“All of these characteristics point toward the statute being a quintessential wage law,” the panel wrote. “Because section 226 is a ‘wage and hour law,’ the cause of action in the underlying lawsuit alleging a violation thereof fell within the scope of the Policy’s wage and hour exclusion.”

For similar reasons, the court said claims for the failure to timely pay earned wages upon discharge and/or resignation also fell within the exclusion.

The panel reached a different conclusion with respect to the claim alleging that the employer failed to reimburse its delivery drivers for necessary business-related expenses they incurred while doing their job, including travel for required training, mileage driven for deliveries and cellphone usage, a violation of sections 2800 and 2802.

“Neither statute mentions wages or hours, nor do they appear in the parts of the Labor Code titled ‘compensation’ or ‘working hours,’” the court wrote. “[T]his observation supports the notion that one would not expect them to be considered wage or hour laws in the absence of an express indication otherwise.”

Further support was found in the function and purpose of the statutes, the panel added.

“Disbursements for losses and work-related expenditures are not payments made in exchange for labor or services,” the court said. “The former protects employees from an employer’s lack of reasonable care and diligence, as well as ensures employers are ‘bear[ing] all of the costs inherent in conducting [their] business[es].’ And the latter ‘prevent[s] employers from passing their operating expenses on to their employees.’”

The panel concluded that the claim brought pursuant to sections 2800 and 2802 fell outside the scope of the exclusion. The court also found that the claim landed within the policy’s coverage in the first instance, as it qualified as an employment-related workplace tort.

As for other allegations from the underlying complaint that could escape the policy exclusion, the court said an unfair business practices claim brought under section 17200 as well as a claim pursuant to the Private Attorneys General Act were “potentially within the scope of the Policy and not excluded” because they were based, in part, on the employer’s alleged failure to reimburse business-related expenses.

To read the opinion in Southern California Pizza Co. v. Certain Underwriters at Lloyd’s, London, click here.

Why it matters: The opinion provides helpful language for employers seeking coverage for employment-related lawsuits, as it found the policy’s wage and hour exclusion did not apply to all the alleged Labor Code violations in the underlying complaint. Instead, the court considered the language, function and purpose of each statutory provision to determine whether it constituted a “wage and hour … law.”