Administrative Exemption To Overtime Compensation Requirements Did Not Apply To Insurance Claims Adjusters

A court of appeal recently rejected two insurance companies’ assertion that the administrative exemption to the overtime compensation requirements applied to their insurance claims adjusters in the adjusters’ lawsuit seeking damages for unpaid overtime.  (Harris v. The Superior Court of Los Angeles County (--- Cal.Rptr.3d ----, Cal.App. 2 Dist., July 23, 2012).

Facts

Insurance claims adjusters (“Adjusters”) filed four class actions lawsuits against their employers, Liberty Mutual Insurance Company and Golden Eagle Insurance Corporation (collectively, “Employers”), seeking damages for unpaid overtime.  Adjusters claimed that Employers wrongfully classified them as exempt administrative employees.  Adjusters and Employers filed motions for summary adjudication of the issue of whether Adjusters are exempt administrative employees.  The trial court certified a class of “all non-management California employees classified as exempt by [Employers] who were employed as claim handlers and/or performed claims-handling activities.”  The court decertified the class as to all claims arising after October 1, 2000, the date the Industrial Wage Commission (“IWC”) replaced an earlier version of Wage Order 4.  Employers withdrew their motion for summary adjudication and the trial court denied Adjusters’ motion for summary adjudication.

Both parties sought interlocutory review by the court of appeal.  The court of appeal directed the trial court to grant Adjusters’ motion for summary adjudication and to deny Employers’ motion to decertify the class.  The Supreme Court, however, reversed that decision because the court of appeal “misapplied the substantive law.”  The Supreme Court remanded the case back to the court of appeal to reconsider the matter.

Decision

The IWC, which has authority under the Labor Code to regulate working conditions of California employees, has promulgated 17 different wage orders that apply to distinct groups of employees.  Wage Order 4-1998 provided that “persons employed in administrative, executive, or professional capacities were exempt from overtime compensation requirements” but “did not articulate the precise scope of the administrative exemption.”  Wage Order 4-1998 did, however, limit the exemption to those employees who “engaged in work which is primarily intellectual, managerial, or creative, and which requires exercise of discretion and independent judgment, and for which the remuneration is not less than $1150.00 per month.”  The practical effect of the IWC’s 1998 orders was that approximately eight million workers lost their right to overtime pay because the orders deleted the requirement that employer pay overtime wages after eight hours of work per day. 

In response, the Legislature amended the Labor Code to provide that an employee is entitled to overtime pay for work performed in excess of eight hours per day or 40 hours per week.  The Legislature exempted from the overtime compensation rules those “‘executive, administrative, and professional employees’ whose primary duties ‘meet the test of the exemption,’ who ‘regularly exercise discretion and independent judgment in performing those duties’ and who earn a monthly salary at least twice the state minimum wage for full-time employees.”

The IWC promulgated Wage Order 4-2001 after reviewing the new Labor Code mandate.  Wage Order 4-2001 also exempts from the premium pay requirements those persons who are “employed in administrative, executive, or professional capacities.”  However, the new wage order describes in some detail who qualifies for the administrative exemption.  It provides “that persons are employed in an administrative capacity if their duties and responsibilities involve office or nonmanual work ‘directly related to management policies or general business operations of [their] employer or [theemployer’s customers.’”  In order for the work to qualify as directly related to the employer’s management policies or business operations, the work must be qualitatively administrative and quantitatively “it must be of substantial importance to the management or operations of the business.” 

In addition, the IWC in Wage Order 4-2001 specifically directs that the issue of whether work is exempt or non-exempt must be construed in terms of certain regulations under the federal Fair Labor Standards Act.  Although the trial court differentiated between the Adjusters’ claims that arose before and after the promulgation of the new Wage Order, the court of appeal held that because “the same federal regulations that are incorporated into Wage Order 4-2001 must be used as a guide to interpreting Wage Order 4-1998 . . . the analysis of the administrative exemption should be the same under both wage orders.”

The court of appeal held that the Adjusters did not qualify for the administrative exemption because their “primary work duties are the day-to-day tasks of adjusting individual claims not directly relating to management policies or general business operations.”  The court interpreted federal regulations as providing “that only duties performed at the level of policy or general operations can satisfy the qualitative component of the ‘directly related’ requirement.”  However, work duties are not administrative if they “merely carry out the particular day-to-day operation of the business.”  The court stated, “An employee who is primarily (namely, more than half of his or her work time . . . ) engaged in work that does not satisfy the qualitative component therefore is not primarily engaged in work that is ‘directly related to management policies or general business operations’”  and “cannot be an exempt administrative employee.” 

Adjusters’ primary duties consisted of the day-to-day tasks of adjusting individual claims through investigating and estimating claims, making coverage determinations, setting reserves, negotiating settlements recommendations for claims beyond their settlement authority, and identifying potential fraud.  None of this work “is carried on at the level of management policy or general operations” and is instead part of Employers’ day-to-day operations.  Although Adjusters may do some work that rises to the level of policy or general operations, such work is not the work in which the Adjusters primarily engage.  The court also noted that “not all activities that involve advising management, planning, negotiating, and representing the company satisfy the qualitative component of the ‘directly related’ requirement.” 

The court rejected Employers’ argument that Adjusters do not produce Employers’ product because that product is transference of risk not claims adjusting.  The court noted that adjusting claims is essential to transferring risk.  Furthermore, workers who do not produce the product of their employer can still perform work that does not satisfy the qualitative component of the “directly related” requirement. 

The court held that, with a few exceptions, the work duties of the Adjusters “do not satisfy the qualitative component of the ‘directly related’ requirement because they are not carried on at the level of policy or general business operations.”  Therefore, the Adjusters “are not primarily engaged in work that is ‘directly related to management policies or general business operations.’”

Questions

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Bruce A. Scheidt, Laura Izon Powell or David W. Tyra | 916.321.4500