[authors: Sam Sorich and Larry Golub]

Finding that the duties of insurance claims adjusters function as the day-to-day operations of an insurer and not “directly related to management policies or general business operations,” a divided panel of the California Court of Appeal (Second Appellate District) held that such adjusters are not exempt from California’s overtime compensation laws.

The July 23, 2012 decision in Harris v. Superior Court is the latest – and potentially not the last word – in the saga as to whether adjusters employed by two insurance companies were entitled to overtime pay. As we earlier reported, the California Supreme Court, in a unanimous opinion issued December 29, 2011, had ruled that the Court of Appeal used an erroneous analysis when it decided that claims adjusters were non-exempt and thus sent the case back to the Court of Appeal to use a correct analysis.

Under the California Labor Code, employees are generally entitled to overtime pay for work in excess of eight hours in one workday or 40 hours in one week. However, the Code exempts administrative employees from the overtime pay requirement.

The Harris case involves claims adjusters employed by Liberty Mutual Insurance Company and Golden Eagle Insurance Corporation. The employees sued the companies for damages based on the failure to pay them for overtime work. The companies argued that the adjusters were administrative employees and thus were not entitled to overtime compensation.

The Court of Appeal originally ruled in favor of the employees. However, as noted above, that ruling was reversed by the Supreme Court, which directed the Court of Appeal to examine the question of whether the adjusters were entitled to overtime pay in light of federal regulations that guide the interpretation of California Wage Orders on the administrative exemption.

In its reconsideration of the case, the Court of Appeal noted that under the applicable California Wage Order, in order for an employee to be subject to the administrative exemption, the employee must be primarily engaged in work that qualitatively is “directly related to management policies or general business operations.” Federal regulations describe the “directly related” requirement.

The court conceded that the federal regulations’ description of “directly related” is not perfectly clear but concluded, “We take it to mean that only duties performed at the level of policy or general operations can satisfy the qualitative component of the ‘directly related’ requirement. In contrast, work duties that merely carry out the particular, day-to-day operations of the business are production, not administrative, work.”

Applying this interpretation to the Liberty Mutual and Golden Eagle adjusters, the Court of Appeal held:

"The undisputed facts show that Adjusters are primarily engaged in work that fails to satisfy the qualitative component of the ‘directly related’ requirement because their primary duties are the day-to-day tasks involved in adjusting individual claims. They investigate and estimate claims, make coverage determinations, set reserves, negotiate settlements, make settlement recommendations for claims beyond their settlement authority, identify potential fraud, and the like."

According to the court, none of that work was carried on at a level of management policy or general operations. Instead, it was all part of the day-to-day operation of the insurers’ business. Thus, the adjusters were not administrative employees and, as a result, they were entitled to overtime compensation.

In light of the importance of this decision, including the fact that the 2-1 opinion was issued by a divided panel of the Court of Appeal, one would expect another request to the Supreme Court that it review the Court of Appeal’s latest ruling.