Coverage for continuing ordinary payroll is something that is an option for many businesses to purchase when they have a business interruption policy. In general, the coverage allows the business owner to continue to pay normal wages to employees during the time the business is closed. The rationale is that it would be difficult for the business to quickly recover, once physical repairs are complete, without having trained and experienced staff on hand to reopen the business. In short, the length and severity of the loss is mitigated.

This works great for employers who fully pay for 100% of their employees, but what happens to those in industries where gratuities make up a significant portion of the employee’s pay? If the business pays the employees for the lost gratuities, in addition to their hourly wages, should the gratuities be recoverable?

The insurance carriers I’ve encountered emphatically answer the above question with a resounding “NO!” Their position is that it is perfectly fine to pay the wages and recover them under the ordinary payroll coverage but not gratuities. Their reasoning is the gratuities are not an expense that is ordinarily paid by the business. The gratuities are paid directly by the customer, to the employee, and the business is under no obligation to guarantee, or pay, any monies related to the gratuities.

I understand their reasoning but view it slightly differently. As a layman, I am not an expert on insurance/contract law. However, I do know when something makes sense or not and this position does not. The idea behind ordinary payroll coverage is to retain valuable employees. If they are only being paid a portion of their income, during the business closure, it is quite conceivable that the employee will seek other employment and not be available. The company will then incur additional expenses to recruit, hire, and train new employees who will most likely be less efficient than the experienced employees for a period of time.

I believe a reasonable consideration is for the gratuities paid by the company to be viewed as an extra expense or an expense to reduce loss. By paying the gratuity portion, the insured is paying an extra expense related to the employees. Having these employees available when repairs are complete will reduce the loss by allowing the company to quickly return to normal operations and prevent the charges related to new employees.

This is not a position that is always accepted by the insurance company but, many forward thinking insurers, are open to the suggestion. The option can save time and money for all parties involved.