[author: Laura S. Flynn]
Frances Harris, et al. v. Superior Court of Los Angeles (Liberty Mutual Ins. Co.)
California Court of Appeal, Second Appellate District (July 23, 2012)
The Second Appellate District of the California Court of Appeal on remand from the Supreme Court has held that insurance claims adjusters are not exempt from overtime compensation 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 Appellate Court was directed on remand to review the trial court’s denial of a summary judgment filed by the adjusters regarding the affirmative defense that the adjusters were exempt administrative employees and thus not entitled to overtime. The Appellate Court was also given the option to review the issue as to whether the administrative exemption was a predominant issue common to the claims of all putative class members, warranting class certification.
In its decision, the Court held that the adjusters’ claims were governed by two different California regulations promulgated by California’s Industrial Welfare Commission (“IWC”): Wage Order No. 4-98 applying to claims arising before October 1, 2000, and Wage Order No. 4-2001, applying to claims arising thereafter. The wage orders govern the wages and hours of employees in “Professional, Technical, Clerical, Mechanical, and Similar Occupations.” (Cal.Code Regs., tit. 8, § 11040.) Both wage orders provide for certain exemptions for overtime compensation requirements. Exemptions are considered affirmative defenses. As a result, the insurance carriers, as the employers, bear the burden of proving the insurance adjusters are exempt.
Pursuant to Wage Order No. 4-2001, 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 [the] employer’s customers.” Work qualifies as “directly related” if it satisfies two components. First, it must be qualitatively administrative. Second, quantitatively, it must be of substantial importance to the management or operations of the business. Both components must be satisfied before work can be considered “directly related” to management policies or general business operations in order to meet the test of exemption. Only the qualitative component was considered to be at issue in the case.
The Appellate Court looked to federal regulations under the Fair Labor Standards Act of 1938 for guidance. Under the federal regulations, the qualitative component provides that an employee’s work duties meet the test of the exemption only if they “relat[e] to the administrative operations of a business as distinguished from ‘production’ or, in a retail or service establishment, ‘sales’ work.” The Appellate Court took that to mean that only duties performed at the level of policy or general operations can satisfy the qualitative component. In contrast, work duties that merely carry out the particular, day-to-day operations of the business are production, not administrative, work.
In regard to insurance adjusters, the Appellate Court concluded the undisputed facts showed they were primarily engaged in work that failed 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.” None of the work was considered to be carried on at the level of management policy or general operations. The Appellate Court acknowledged that some of the adjusters might do some work at the level of policy or general operations, i.e., participating in consultations as to whether the company should issue certain types of policies or serving on committees that determine how to better run the business. However, there was no evidence any of the adjusters primarily engaged in such work.
The Appellate Court acknowledged that its decision is inconsistent with a number of federal circuit and district court cases that have concluded claims adjusters are exempt, e.g., Palacio v. Progressive Ins. Co. 244 F.Supp.2d 1040, 1047 (C.D. Cal. 2002). However, the Appellate Court is not bound by decisions of the lower federal courts on issues of federal law, and found none of the federal cases involving claims adjusters persuasive. In regard to class certification, the Appellate Court concluded that the exemption status was a predominant issue common to the claims of all members of the class. The trial court was directed to enter an order granting the plaintiffs’ motion for summary adjudication of defendants’ affirmative defense based on administrative exemption and denying in its entirety defendants’ motion to decertify the class.
The opinion is consistent with the California Appellate Courts’ policy of liberally construing wage and hour regulations in furtherance of their remedial purpose which results in exemptions to the regulations being narrowing construed.
For a copy of the complete decision see: