Retail Risks

Complications With Compliance

New ACA reporting demands and controversies over the minimum wage are adding regulatory risk to the retail industry. 
By: | October 1, 2015 • 8 min read

Wage-and-hour lawsuits are the bane of employers, and few industry sectors are as challenged by the Fair Labor Standards Act as retailers, with their multitude of part-time, minimum-wage workers and the potential for misclassifying employees who might be due overtime pay.


The difficulties will only increase as demands for a higher minimum wage grow at the federal level and in various states and cities throughout the country.

But retail risk managers have more on their plates than complying with the FLSA — or struggling to model how potential wage hikes will impact the organization. An even more cumbersome and complicated entree is new Affordable Care Act reporting rules, which are kicking in this year.

These two items are not only adding to retailer regulatory risks, but they also have the potential to increase costs for workers’ compensation and general liability policies. Not to mention the possible multimillion-dollar wage-and-hour lawsuit settlements, which are not uncommon for large employers.

New Reporting Regulations

“The [ACA] reporting is a challenge, partially because it’s new but also because of the timing in the way it was rolled out — the expectations and overall complexity of what employers have to do,” said Jay M. Kirschbaum, practice leader, national legal and research group, Willis Human Capital Practice.

Edward Fensholt, senior vice president, director of compliance services, Lockton

Edward Fensholt, senior vice president, director of compliance services, Lockton

“We might call it the spiked tail on the beast they have been grappling with for a number of years,” said Edward Fensholt, senior vice president, director of compliance services, Lockton.

According to a 2015 PricewaterhouseCoopers survey, only 10 percent of employers have an ACA reporting solution in place, and 16 percent have not even considered a solution yet.

Nearly two-thirds (65 percent) said the quality of the data they will use to determine health care eligibility is a concern.

Beginning in January 2016, employers subject to the ACA reporting requirement must file with the IRS a Form 1094-C and, for at least each full-time employee, a Form 1095-C detailing data on employees and, in some cases, their dependents related to health care eligibility and affordability in 2015 under the ACA’s employer mandate. Employees also must be notified.

“We might call [ACA reporting rules] the spiked tail on the beast they have been grappling with for a number of years.” — Edward Fensholt, senior vice president, director of compliance services, Lockton

Employers face a $250 fine for each form that is not filed, up to a $3 million maximum, said Fensholt, although he noted the IRS has indicated a willingness to allow slight filing extensions and to excuse some errors or failures if the employer made a good faith effort to comply.

For retailers, the issue is made more problematic by high turnover in the industry; the preponderance of hourly employees, many of whom may fluctuate between full-time and part-time employment; multiple locations; new coding requirements; monthly reporting rules; and for large employers, mandatory electronic filing.

Jay M. Kirschbaum, practice leader, national legal and research group, Willis Human Capital Practice

Jay M. Kirschbaum, practice leader, national legal and research group, Willis Human Capital Practice

“They are all scrambling to figure out what they are going to do,” Kirschbaum said. “The payroll industry has not covered itself in glory in getting packages together, but in their defense, I don’t think they had much advance warning.”

And for those employers that did not proactively begin planning and lining up key partners — and many employers postponed action until after the Supreme Court ruled on the constitutionality of health care subsidies in June — some are now finding themselves left to their own devices.

“The demand for that service is so high,” Fensholt said, “that many of these payroll and other vendors said this summer that they are not taking any new customers. They are at maximum capacity.”

In addition, because many employees in the retail industry have variable hours or are part-timers, some companies may be challenged to respond to notices from health care exchanges about subsidized insurance. When employees apply for subsidies, employers must validate or challenge the subsidy. Failure to respond on a timely basis could trigger penalties, according to PwC.

“Particularly for multi-state employers with many worksites, responding to the exchange notices on a timely basis could be very challenging since state exchanges may vary in their notices and response procedures,” according to PwC.

Wage-and-Hour Concerns

With ACA compliance added atop the possible flux in the minimum wage, it’s clear why regulatory concerns are considered a top risk for retailers, according to the 2015 “BDO Retail RiskFactor Report.”

“Federal, state and/or local regulations” tied as the No. 1 risk with “general economic conditions” and “competition and consolidation” in BDO’s most recent report. It was No. 2 in both 2014 and 2013, and No. 4 in 2012.


Many of the employee recordkeeping challenges retailers face in complying with ACA regulations are also challenges for wage and hour issues, but the growing demand for a $15 an hour minimum wage (already adopted in Seattle, San Francisco and Los Angeles and for fast-food workers in New York), plus a proposed minimum wage hike at the federal level — from $7.25 an hour to $10.10 an hour — add more complexity.

When Walmart recently hiked its minimum wage for new workers to $9 an hour — to increase employee engagement and customer service — grumbles arose among longer-term employees who received no raise and felt their experience and commitment were being undervalued.

Part of the modeling some companies are doing looks at not only the increase to minimum wage but also increases in wages for others in the organization, said Brandi Boles, vice president, Lockton.

“It’s a true domino effect,” she said.

In addition, the U.S. Department of Labor has proposed raising the salary threshold used to determine whether employees are eligible for overtime pay from $455 per week to $970 per week.

That may require employers to reclassify part-time managers or administrative employees who are on a salary basis, as hourly, nonexempt employees.

Adeola Adele, executive vice president and EPL product leader, Willis FINEX practice

Adeola Adele, executive vice president and EPL product leader, Willis FINEX practice

“That could create some challenges for companies,” said Adeola Adele, executive vice president and EPL product leader, Willis FINEX practice. “It’s not just about adjusting the salary, it’s about the actual responsibilities the employee has.

“Ultimately, the challenge is one of classification [of workers as exempt or nonexempt],” she said. “Retailers have to stay even more vigilant in the way in which they attempt to comply.”

A final rule is expected to take effect in 2016. If so, it “would impact 5-10 million workers, many of whom are concentrated in the retail and hospitality industries,” according to Alex Passantino, leader of the wage and hour litigation practice group at Seyfarth Shaw. “Some other estimates believe the number of impacted employees is more likely to be in the range of 15 million.”

The National Retail Federation puts the number of affected retail and restaurant workers at 2.2 million, and estimated it would cost $745 million to comply with new federal regulations.

The cost of federal wage-and-hour lawsuits is already astronomical. The number of FLSA lawsuits filed against employers has increased by more than 300 percent since 2000, from 1,854 claims in 2000 to 8,126 cases in 2014, according to Seyfarth Shaw, which tracks such litigation.


The proposed FLSA rules are “definitely going to create challenges,” Boles said. “It’s already creating challenges.

“There’s a lot of time and effort running a lot of modeling, looking at different angles. What has to happen, what needs to happen if these changes were to occur,” she said.

If labor costs increase due to a wage hike, retailers, already battling thin margins, may be forced to increase product prices. And that could impact insurance premiums.

Insurance Implications

Because workers’ compensation insurance is based on employer payroll, companies would undoubtedly see carriers asking for increased premium costs should the minimum wage be hiked, according to Lockton.

Brandi Boles, vice president, Lockton

Brandi Boles, vice president, Lockton

“I am looking at ways to be able to offset and/or credit policy audits as a result of the pure minimum wage impact,” Boles said. “We are working with individual carriers to create strategies to acknowledge the fact that individual company exposure has not changed, and it’s just due to a minimum wage increase.”

Thus far, carriers have been receptive, she said.

But because retailers may opt to increase product prices to offset the potential labor costs, they also would likely see their general liability policy premiums increase, since they are based on revenue.

“I am looking at ways to be able to offset and/or credit [workers’ comp] policy audits as a result of the pure minimum wage impact.” — Brandi Boles, vice president, Lockton

Wage-and-hour lawsuits generally fall within the scope of employment practices liability insurance, but most policies exclude coverage for violations of the FLSA or similar state or local laws, according to attorneys at Dickstein Shapiro.

The attorneys noted, however, that even if indemnity coverage is ultimately excluded, the carrier may have a duty to defend the employer if the complaint includes the possibility that one of the claims is potentially covered by the policy.

Adele noted that the Bermuda market within the last two years has developed a stand-alone wage-and-hour insurance policy to respond to such allegations, covering defense and indemnity costs.

Contrary to some brokers’ expectations, though, the coverage has not seen significant take-up, she said, partly because the premium is still relatively high and the minimum retention is $1 million.


“Not every company is willing to take that kind of retention,” Adele said. “I think over time, as more competition is introduced, there will be more interest in wage-and-hour insurance and the policies will probably become broader to address some of the emerging wage-and-hour risks.”

However, she said, with the current volatility, “I think insurance carriers are treading very carefully to make sure they are insuring a loss that would still be profitable for them.”

Profitability, of course, will also continue to be the major factor underlying the struggle of retailers as they attempt to meet these complex regulatory demands.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]
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RIMS 2015

Anticipating ACA Risks

Speakers identify key compliance risks presented by the ACA and how to head off vulnerabilities.
By: | April 23, 2015 • 4 min read

As implementation of the Affordable Care Act rolls onward, many employers are still lagging in compliance due to the law’s complexity, according to a presentation at the annual RIMS conference held this week in New Orleans, La.

One reason could be is that the act itself is about 10,000 pages in length.

“People tell me they’ve read the whole thing. I don’t believe them,” said James Anelli, partner at LeClairRyan, a law firm that also provides business counsel.


The primary area of confusion, especially for smaller employers, is determining whether or not they are in fact covered by the ACA. Employers must offer “minimum-value” health care coverage if they have at least 50 full time – or “full time equivalent” – employees.

Full time equivalency is calculated by adding all part-timers’ service hours per month and dividing by 120. An average of 30 hours per week qualifies as full time. Employers with many part-time employees often get tripped up here, as “service hours” include actual work time, paid time off and vacation days.

Wellness plans present another challenge. Encouraged by the ACA as a method to create a healthier workforce and reduce costs long-term, wellness initiatives have come under heavy fire by the Equal Employment Opportunity Commission for violations of the Americans with Disabilities Act (ADA) and the Genetic Information Nondiscrimination Act (GINA).

The EEOC filed three lawsuits against employers in 2014, alleging that their wellness plans were not effectively “voluntary” due to severe penalties or withdrawal of incentives levied against employees who did not participate.

“If your company has not had a conversation with your D&O carrier, you’re a little behind on the times,” said Randy Jouben, director of risk management for Five Guy Enterprises, Inc.

“We know there will be claims,” and employers should know who will cover their defense costs.

“If there’s a section that plaintiff’s attorneys will latch onto, it’s the retaliation provision.” —  Randy Jouben, director, risk management, Five Guys Enterprises, Inc.

The ACA’s non-discrimination provision with respect to benefits also makes employers vulnerable to litigation. Employers can’t offer advantages like free coverage or shorter waiting periods to highly compensated employees.

The penalty for doing so is an excise tax of $100 per day for each individual negatively affected. But the real penalty will be in the cost to defend against claims by employees that claim they were treated unfairly.

“If there’s a section that plaintiff’s attorneys will latch onto, it’s the retaliation provision,” Jouben said.

An employee who is terminated could potentially claim they were targeted for objecting to an action or practice by their employer that does not comply with the ACA.

“The standard of proof is incredibly low,” Anelli said. An employee would simply have to show that their objection was a contributing factor to their termination; then the burden of proof falls on the employer to show it was non-discriminatory.

The speakers reiterated that “litigation will occur because of the sheer complexity and uncertainty surrounding numerous issues relating to ACA implementation.” With a lack of regulatory guidance in place, court decisions will fill in the gaps, and are likely to vary widely from state to state. In essence, ACA mandates will be enforced by plaintiff’s attorneys, more so than the federal government.

“Litigation will occur because of the sheer complexity and uncertainty surrounding numerous issues relating to ACA implementation.”

In addition to lack of guidance, many companies lack the resources to update their systems and policies quickly and effectively.

According to Jouben, risk management, human resources, IT and legal departments all need to work together to identify compliance issues, because “no one group will fully understand it.”

“This screams for ERM,” he said.

“This is an opportunity for risk managers to be the heroes. They have to let people know who’s on the hook.”

New reporting requirements also present additional risks. Beginning in 2015, employers must report certifications for penalty exemptions and other details of the coverage they offer to the IRS.

“Many HR systems are not set up to capture this information,” Jouben said. Many may not distinguish, for example, between stand-alone dental and vision plans – which may not be covered by the ACA – and those that are rolled into full health care plans, which would be subject to ACA provisions.

Collecting and reporting more detailed health plan information also introduces greater cyber risk.

Employers should adopt “clean desk” policies, ensuring that physical documents are scanned into systems that can encrypt their information and are then shredded.

Thirty states so far have enacted laws to destroy personal identifiable information or otherwise render it undecipherable through encryption. Forty six states have legislation requiring notification of a breach to all affected parties.


Jouben and Anelli also addressed concerns that ACA implementation will drive up health care costs. Jouben pointed out that hospitals and health care providers have been a driving force in stabilizing rate increases, and Medicare reimbursement rates have actually decreased. However, it’s unclear if this trend will continue.

Regardless of its effectiveness in reducing health care costs thus far, the reality is that the ACA is here to stay for the foreseeable future, and employers must face its complexity head-on, utilizing resources from every department to find gaps in compliance.

Katie Siegel is a staff writer at Risk & Insurance®. She can be reached at [email protected]
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Sponsored: Liberty International Underwriters

A Wake up Call for Any Company That Touches Food

With costly outbreaks on the rise, don't let product recalls and contamination spoil your business.
By: | October 1, 2015 • 5 min read

It’s not easy to be in the food industry these days.

First, there is tougher regulation. On August 30, 2015, the Food Safety Modernization Act (FSMA) required companies to file planning paperwork for Preventive Controls for Human Food. The final FSMA rules take effect on August 30, 2016.

Next, increases in food recalls, some deadly, are on the rise. In early September, 9,000 cases of frozen corn were pulled from shelves after a listeria scare. A few days later, a salmonella outbreak in cucumbers imported from Mexico resulted in one death, while sickening hundreds of consumers nationwide.

Courts are getting tougher, too, as owners/executives in particularly egregious cases involving consumer deaths have been prosecuted criminally, with one receiving a recommendation for a life sentence.

Finally, advances in science – including whole-genome sequencing technology, which maps DNA of microbes to more easily pinpoint precisely where contamination occurs – can expose every player in the supply chain to potential losses and lawsuits.

“Few companies have the balance sheet or brand loyalty to survive a serious recall. Outbreaks, new regulations, prosecutions and science have made purchasing product recall and contamination insurance literally an act of survival for companies of all ages and sizes,” said Jane McCarthy, Senior Vice President of Global Crisis Management at Liberty International Underwriters (LIU), who has over 30 years of industry experience.

Working with growers, processors, manufacturers, importers, shippers, packagers, distributors, wholesalers or retailers, LIU’s policy provides indemnity to pay for losses a company might incur from a recall, including logistic expenses, lost income and access to crisis management and public relations consultants.

Legislation tightens on food-related companies

LIU_SponsoredContentPassed in 2011, the FSMA gives the Food and Drug Administration a far more proactive weapon in the war on tainted food, as the focus shifts to prevention combined with the FDA’s newfound authority to close businesses that aren’t complying with FSMA rules and regulations.

In addition to the August 30, 2015 deadline for filing paperwork for preventive controls, as part of the law, all companies need to be registered if they do anything with food in the United States, or a company is a foreign entity bringing food into the U.S.

“It’s the law and every regulation and benchmark has to be met,” McCarthy said. “The FDA will shut someone down if they don’t think a company is handling a food product properly. With these new rules and regulations, the whole industry has to change.”

With LIU’s product contamination policy, companies have 24/7 access to pre-loss consultancy through red24, one of the world’s leading security consultants and global crisis management consultancies. For example, they’ll work with clients to best prepare them to meet the FDA’s 48-hour response deadline should a food contamination or product recall incident occur.

Costly outbreaks on the rise

LIU_SponsoredContentAccording to a Wall Street Journal article, food recalls from 2012 to 2014 increased more than five times compared to the total number of recalls from the prior eight years combined. The Journal also reported that foodborne illness is often never formally reported, so about 48 million Americans, or one in six, get sick each year from food. The CDC estimates 128,000 hospitalizations and 3,000 deaths from tainted food.

Food contaminations happen in two main categories: allergens (peanuts, etc.) and pathogens (bacteria). There were four listeria outbreaks in 2014 alone, compared with one in each year from 2011 to 2013. Listeria is a particularly tricky and virulent pathogen that continues to survive and blossom, even in refrigerated environments. Listeria does not impact the appearance, taste or smell of food it invades, so a company in the food industry can only confirm contamination through testing or, unfortunately, once a customer becomes ill.

“Listeria is one of the worst nightmares. Not only is it deadly, but once it gets into a plant, it’s very difficult to eradicate,” said industry veteran Meg Sutton, LIU’s Senior Claim Officer. “It sneaks into drains and crevices that you thought were clean. Attempts to clean those drains and crevices, if done improperly, can result in aerosolizing the listeria and spreading it throughout the facility. In some cases, companies are forced to shut down the plant for extended periods of time, resulting in significant business interruption and loss of revenue.”

Courts get tough on deadly cases

LIU_SponsoredContentWith the increase and severity of food contamination recalls rising, the courts are getting tougher too. The food industry was rocked last month by a recommended life sentence for the ex-CEO of a peanut manufacturing company following a multiple-felony conviction for knowingly selling tainted peanut butter that ended up killing nine people.

“The judge ended up sentencing him to 28 years in federal prison, still the harshest penalty ever in a case of food contamination. While our policy won’t cover your defense if you’ve committed a crime, the penalty is another wake up call for the food industry that executives at the highest levels will be held accountable,” McCarthy said.

Science boosts detection, transparency

LIU_SponsoredContentAdvances in DNA mapping are on the rise. “Before this technology, people would say, ‘It wasn’t us! Prove it!’ and that was pretty much impossible,” McCarthy said. “Those days are gone now.”

By using today’s scientific methods to trace back to the source (grocery store, restaurant, wholesaler, etc.), experts can determine the production facility or farm that originated the food or food additive. They can swab the facility for DNA matches and pinpoint the contamination.

Considering those four prime drivers, it’s not surprising that interest in food product recall and contamination coverage from companies of all sizes is gaining momentum.

“We don’t want them to just buy our insurance,” McCarthy said. “We want them to be better for it with us as their partner by making sure they have the right coverage in place and improving their business from a health, safety and compliance standpoint.”

Liberty International Underwriters is the marketing name for the broker-distributed specialty lines business operations of Liberty Mutual Insurance. Certain coverage may be provided by a surplus lines insurer. Surplus lines insurers do not generally participate in state guaranty funds and insureds are therefore not protected by such funds. This literature is a summary only and does not include all terms, conditions, or exclusions of the coverage described. Please refer to the actual policy issued for complete details of coverage and exclusions.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty International Underwriters. The editorial staff of Risk & Insurance had no role in its preparation.

LIU is part of the Global Specialty Division of Liberty Mutual Insurance.
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