Wage & Hour Class Actions

Transcription

1 Wage & Hour Class Actions HOW TO MITIGATE THIS PARTICULARLY PERNICIOUS THREAT TO COMPANIES A company faced with a class action settlement must accept the variability of the class action suit and GAAP charges on its financial statements, or obtain class action settlement insurance coverage. Peter Robbins, CPA, Shareholder, CliftonLarsenAllen LLP

2 The Problem With the myriad and ever-changing employment regulations, a company s greatest asset - - its workforce -- can suddenly become its biggest liability. Employment-related claims can create high-stakes, company-crippling litigation when the employees are able to seek substantial compensation for claims arising from: 1. Unpaid or underpaid overtime; 2. Unpaid or underpaid benefits; 3. Unpaid rest breaks or don/doff required gear; 4. Improper deductions from wages; or 5. Misclassified employees. With Wage & Hour claims now the leading segment of workplace litigation, jumping 423% over the last two decades and quadrupling during the last 10 years, companies are forced to take notice. More than 7,000 lawsuits are filed under the Fair Labor Standards Act (FLSA) each year, many of them as class or collective actions. In California, it is estimated that 50% of all new cases are related to employer-employee litigation arising out of FLSA and state wage and hour laws/regulations. Fulbright & Jaworski s, 2013 Litigation Trends Survey of nearly 400 leaders of corporate legal teams once again names employment related litigation as the fastest growing type of multi-plaintiff lawsuits with the following categories having the most explosive growth: Wage & Hour-based claims; race and gender discrimination; and misclassification claims. A recent example is a lawsuit filed against Apple Inc. for its practice of checking employees bags for stolen merchandise as they come and go from breaks. Plaintiff employees allege they can wait up to 15 minutes to have their bags checked, time for which they are not paid. The two employees who filed the proposed class action say they are owed $1,500 in unpaid overtime. If Apple's 42,000 retail employees would be eligible to assert such claims, the aggregate risk and exposure would be staggering (Frlekin and Pelle, et al. v. Apple Inc., Case No. CV , N.D. Calif.). The Risk If a class action cannot be dismissed quickly, a company must weigh the actual and intangible costs of protracted litigation including: legal fees and expenses, concomitant distraction from business pursuits, time executives spend with lawyers, preparing for and providing testimony, lost opportunities, negative publicity, reputational damage, and damage to the workplace environment, which can diminish productivity. 2

3 In addition, the potential exposure from these cases can be astounding because: the cases typically affect large numbers of people; the class receives direct notice; the benefit can be hundreds or thousands of dollars; and the class may be highly motivated to file claims against their current or former employer to seek additional compensation. The take rate - - the percentage of class members who will seek compensation -- is dramatically higher than other consumer class actions. According to the Trends in Wage and Hour Settlements report, courtesy of National Economic Research Associates, companies paid $467 million to settle Wage & Hour lawsuits in 2012, with the average settlement being $4.8 million for the class and the average payment per class member being $6,373. The top ten Wage & Hour cases settled for an average of $34 million. Given the size of the benefit available, class members file claims and seek compensation from these settlements at extraordinarily high levels. Also, the claim period is typically longer than consumer cases and may stretch over several quarters and more than one fiscal year. This uncertainty can wreak havoc to a company s financial planning and balance sheet. In his article, Class Action Settlements: Financial and Tax Reporting (TAX LAW NEWS, State Bar of Arizona, March 2013), CPA Peter Robbins, offered a hypothetical in which Company X is involved in a $250 million class action settlement. That amount must be reported as an accrued liability and Company X must provide detailed disclosure of the claim, Robbins wrote. Ongoing, quarterly disclosure will be required and the company s financial statements will show a charge to income of $250 million, he said. A company faced with a class action settlement must accept the variability of the class action suit and GAAP charges on its financial statements, or obtain class action settlement insurance coverage. Peter Robbins, CPA Shareholder CliftonLarsenAllen LLP Robbins continued that Company X management may attempt to spin the settlement in a positive light, but it will most likely be difficult to convince investors that a $250 million loss is anything but a significant loss that harms not only the company s economic position, but also the investor s individual investment in the company. Additionally, attempts to minimize or mitigate the real economic impact of the settlement may set up the company for potential shareholder derivative and securities fraud lawsuits. Worse still, if the claim is found to have arisen from a capital transaction or is punitive in nature, the loss may not be deductible on the tax return further harming the company s financial position. Even if the claim is deemed to be deductible, the company is further exposed to scrutiny by the IRS and potentially the necessity of defending the tax position. Given all of these complications, Wage & Hour class actions present a particularly insidious risk. The potential classes are large and easy to identify. Class members who feel they have been cheated out of wages and opportunities, as examples, are highly motivated to collect rewards. The Class members, who no longer work for the company, will be anxious to collect substantial benefits after receiving direct notice about a settlement. With a particularly long opt-in process, the liability the full amount of the entire potential settlement -- will create uncertainty and financial instability while claimants seek their share of the recovery. 3

4 Sophisticated class action practitioners should always consider Class Action Settlement Insurance. By using this unique product, I was able to craft a settlement early in the litigation, thereby saving substantial litigation costs and expenses while capping the company s liability exposure at a fixed cost and within my client s budget. This case could not have settled without Class Action Settlement Insurance." Martin Jaszczuk Locke Lord LLP The Solution RiskSettlements provides both guidance and solutions. Our team of lawyers and consultants use a data-driven approach to advise companies on risk mitigation strategies for class action settlements," Managing Director Joel M. Fineberg says. "Armed with data and unique expertise in risk mitigation, we provide access to the only post-lawsuit settlement insurance in the marketplace at compelling costs. So now, companies can find a pathway to resolution which provides peace, certainty, finality and other financial benefits at a known cost. For too long, companies would inquire if they could insure the settlement risk that they were facing due to certain and substantial losses from class action litigation. Would an insurer actually take on the claim s exposure when they were providing direct or publication notice to a class asking them to file claims and get money back? Now, for the first time, with the assistance of RiskSettlements, the answer is YES! That risk, the known exposure, and the uncertainty of claims can be insured so companies can settle class action litigation for a fixed cost. Class Action Settlement Insurance provides: Insurance coverage which can be purchased at the time of settlement to cover class members' claims; Certainty as to the cost of a settlement from claims; Coverage of 100% of valid claims up to the policy limits; Resolution at a fixed cost regardless of the velocity and intensity of claims; Help to facilitate resolution thereby ending legal expenses and litigation uncertainty and exposure; An easier path to settlement and finality for all parties; and Financial security as coverage is backed by a major global insurance company. 4

5 Settlements should be about ending uncertainty rather than just shifting the litigation risk to claims risk. Parties deserve peace of mind and finality at a known cost. We provide that certainty." Joel M. Fineberg RiskSettlements A company faced with a class action settlement must accept the variability of the class action suit and GAAP charges on its financial statements, Robbins said in his March 2013 article, or obtain class action settlement insurance coverage thereby limiting the company s exposure by fixing its loss to the amount of the insurance premium. Companies need to weigh carefully the financial and investor impact of the charge against earnings, the ultimate take rate risk, the issue of tax deductibility, and the certainty and finality of the insurance alternative in order to determine whether the purchase of insurance will provide the best option to mitigate the financial and tax impact of the class action settlement liability. With Class Action Settlement Insurance, settling companies can mitigate the financial drag and uncertainty caused by unpredictable and uncertain financial risk and costs. Settlements should be about ending uncertainty rather than just shifting the litigation risk to claims risk, Fineberg says. Parties deserve peace of mind and finality at a known cost. We provide that certainty. 5

6 Our Guarantee Results Without Risk If we cannot achieve our mission, there are no fees or costs. What We Provide Consulting services to help companies analyze the risk. Guidance on how to structure resolutions to exit class litigation. Relief from the burdens of oversight and the expense of auditing, reviewing and analyzing claims while streamlining the entire process. Access to the nation s only post-litigation Class Action Settlement Insurance. Contact the experts at RiskSettlements today and find out how we can help you reduce the risk of class action settlement cost exposure. Also, visit us on the web at Joel M. Fineberg Managing Director (972) jfineberg@risksettlements.com Forge Ahead. David Diamond Managing Director (972) ddiamond@risksettlements.com Our experts will help you overcome the risks of class action settlement cost exposure..risksettlements.com 6