Just before the New Year the California Supreme Court issued its long awaited opinion in Harris v. Liberty Mutual Insurance Company, S156555, addressing whether insurance claims adjusters can qualify for the administrative exemption from California's overtime laws.1 Specifically, the Harris decision addresses whether the "administrative/production worker dichotomy" (a doctrine where a court looks at whether an employee's job relates to the company's product rather than to its management policies) precludes claims adjusters from meeting the administrative exemption test as a matter of law. The decision comes as a welcome relief to employers in the insurance industry in that the California Supreme Court rejects the Court of Appeal's categorical ruling that claims adjusters who do not "perform at the level of policy or general operations" cannot, as a matter of law, qualify for the exemption because they are "production" workers.

The California Supreme Court received extensive briefing on the overtime issue, including briefing by SNR Denton on behalf of the Association of California Insurance Companies ("ACIC") and Property Casualty Insurers Association of America ("PCI"). Interestingly, the United States Department of Labor filed an amicus brief in support of the insurers' position as well.

California's Administrative Exemption

Relevant here, to qualify for the administrative exemption in California, an employee must:

  • Perform office or non-manual work directly related to the management policies or general business operations of his or her employer or the employer's customers; and
  • Customarily and regularly exercise discretion and independent judgment; and
  • Regularly assist a proprietor or bona fide executive or administrator, or perform under only general supervision work along specialized or technical lines requiring special training experience, or knowledge, or execute special assignments under only general supervision; and
  • Be "primarily engaged" in exempt activities; and
  • Earn a salary of at least twice the state minimum wage for full-time employment ($33,280).

Wage Order 4-2001, 8 CCR §11040, §1(A)(2).2

The Harris opinion addresses the first of these requirements, whether the work of claims adjusters is "directly related to the business operations of the employer or his customers."

The Harris Case

The plaintiffs in Harris were claims adjusters employed in California by Liberty Mutual Insurance Company and Golden Eagle Insurance Corporation. Plaintiffs alleged that their employers improperly classified them (and a class of others in the same job positions throughout California) as exempt, thereby denying them overtime payments.

Plaintiffs moved for summary adjudication of Liberty Mutual's and Golden Eagle's administrative exemption defense. The trial court denied the motion. On interlocutory review, the Court of Appeal applied the "administrative/production worker dichotomy" and held that, as a matter of law, only employees who "perform at the level of policy or general operations" can qualify for the administrative exemption. According to the Court of Appeal, claims adjusters, as "production" workers cannot meet the first element of the exemption. Harris v. Sup. Ct., 154 Cal.App.4th 164, 177 (2007) (emphasis added).

The California Supreme Court granted review, but held the Harris case for almost four years before granting oral argument.

The California Supreme Court Rejects the "Rigid Rule" Established By the Court of Appeal

As the Supreme Court noted, the first requirement of the administrative exemption, (whether the work of claims adjusters is "directly related to the business operations of the employer or his customers") has two components: first that the work be qualitatively administrative, and second that the work be of substantial importance to the management or operations of the business. Harris, S156555, at 10. Harris addresses only the first part - i.e., whether the work of claims adjusters can be qualitatively administrative. Harris, S156555, at 11. The Court of Appeal had answered this question in the negative (except for those employees who "perform at the level of policy or general operations"), based on the "administrative/production worker dichotomy."

The Court of Appeal's decision relied in large part on previous Court of Appeal cases in Bell v Farmers Ins. Exchange, 87 Cal.App.4th 805 (2001) and 115 Cal.App.4th 715 (2004) in which the court used the "administrative/production worker dichotomy," as well as opinions from the California state enforcement agency (the "D.L.S.E.") specifically related to the facts of that case, to find the claims adjusters in that case non-exempt under an earlier (and far less detailed) version of the California Wage Order. The California Supreme Court criticized the Court of Appeal's reliance on Bell "to create a rigid rule" both because Bell was a fact specific opinion (where the defendants had stipulated that the adjusters' work was "routine and unimportant") and because Bell addressed an earlier version of the California Wage Order which did not provide clear specific guidance on the exemption by incorporation of various federal regulations relating to the FLSA. Harris, S156555, at 18.3

The federal regulations which are expressly incorporated into the current Wage Order, the California Supreme Court noted, expressly include as examples of "administrative work" numerous tasks which claims adjusters often perform, such as "advising the management, planning, negotiating, and representing the company." Harris, S156555, at 19, discussing Former 29 CFR 541.205(a), (b), and (c). Not only did the Court of Appeal in Harris improperly narrow this federal regulation, it chose to consider other federal regulations not directly relating to the exemption and, more importantly, not incorporated into the California Wage Order. Harris, S156555, at 21.

While expressing no opinion on the strength of the parties' positions, the California Supreme Court remanded the case, holding that the "Court of Appeal improperly applied the administrative/production worker dichotomy as a dispositive test." Harris, S156555, at 22. (emphasis added)

The Effect of Harris

Harris is a very positive opinion in that it eliminates the "rigid rule" of using the "administrative/production worker dichotomy" as a dispositive test to preclude application of the administrative exemption. ("We do not hold that the dichotomy can never be used as an analytical tool. We merely hold that the Court of Appeal improperly applied the administrative/production worker dichotomy as a dispositive test." Harris, S156555 at 22). Harris does not, however, provide a bright line ruling as to the exempt status of claims adjusters in general. Instead, "in resolving whether work qualifies as administrative, courts must consider the particular facts before them and apply the language of the statues and wage orders at issues." Harris, S156555 at 22. As always, exempt status of employee will continue to require an individualized fact-intensive inquiry of all of the elements of the exemption and based on the circumstances of any particular case. However, the Harris case provides guidance with respect to the administrative exemption which will prove useful to insurers in the future.

Footnotes

1. Unless an employee qualifies under an enumerated exemption, California law requires overtime pay at 1.5 times the employee's regular rate of pay when the employee works more than 8 hours in a workday, or more than 40 hours in a workweek, or during the first 8 hours on the 7th consecutive day of work in the workweek. Double time is required for hours over 12 in a workday or in excess of 8 on the 7th consecutive day of work in a workweek. Additionally, non-exempt employees who miss meal or rest breaks are entitled to an hour's additional pay (up to two hours per day).

2. There is an analogous exemption under the federal Fair Labor Standards Act ("FLSA"), which also requires overtime pay for non-exempt employees. California's requirements, including its standard for the exemption, are more strenuous than the FLSA.

3. The federal regulations are incorporated into the California Wage Order as they were written at the time the Wage Order was adopted. Because the federal regulations were amended in 2004, references are to "former CFR" sections.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.