California Supreme Court Depublishes Case Holding That Insurance Adjusters Are Nonexempt Employees

by Manatt, Phelps & Phillips, LLP

[authors: Esra A. Hudson and Justin Jones Rodriguez]

On July 23, 2012, a California appellate court decided Harris v. Liberty Mutual Insurance Company, holding that insurance adjusters were not covered by the administrative exemption and therefore must be paid overtime pay.  The decision troubled employers in the insurance industry, who typically had classified adjusters as exempt employees.  On October 24, 2012, the California Supreme Court took issue with the Court of Appeal's opinion, which it depublished, and also denied further review.  As a result, the case is no longer binding legal authority and cannot be cited as precedent.

California employees are entitled to overtime pay for work in excess of eight hours in one workday or forty hours in one week.  However, in 1998, California's Industrial Welfare Commission ("IWC") promulgated Wage Order 4-1998 limiting the right to overtime pay by making "persons employed in administrative, executive, or professional capacities" exempt from overtime compensation requirements.  One year later, the California Legislature found that the order caused roughly eight million California workers to lose their right to overtime pay, and enacted the Eight-Hour-Day Restoration and Work Place Responsibility Act of 1999 in order to narrow the scope of the administrative exemption.

In Harris, a class of insurance claim adjusters sued Liberty Mutual in 2001 on the grounds that they had been misclassified as exempt, and thus were entitled to back pay.  Relying on Bell v. Farmers Insurance Exchange, the Court of Appeal rejected Liberty Mutual's argument that the adjusters were administrative employees. 

The California Supreme Court reviewed the decision last year and unanimously concluded that the Court of Appeal had used an erroneous analysis when it decided that claims adjusters are not exempt from California's overtime pay requirement.  According to the Supreme Court, the Court of Appeal relied too heavily on the administrative/production worker dichotomy used in the Bell decision, and failed to consider more recent IWC and applicable federal regulations which are supposed to guide California in applying the administrative exemption to the general overtime rule.  The Supreme Court's decision seemed to signal greater ease for employers in classifying employees as exempt.

But on remand, the Court of Appeal again held that the adjusters were nonexempt employees entitled to overtime pay.  Harris was significant because it purported to establish a clear test for when an employee's work is directly related to management policies or general business operations so that the employee may properly be classified as exempt.[1]  Harris held that work at a policy or general level meets the requirement because such work is directly related qualitatively to management policy and general business operations; on the other hand, work that merely carries out a business's day-to-day operations is production and not administrative work, according to Harris

Before Harris, adjusters' work seemed to fall within the federal and state administrative exemptions because such work includes negotiation of settlement agreements, representing companies in other respects, and making purchases-all activities listed in the federal regulations as potentially administrative.  Indeed, Harris cited more than a dozen federal cases, most holding that adjusters do work that is directly related to management policies or general business operations.  Harris, however, openly challenged the logic of such holdings by arguing that even though such work may be administrative in nature, it may also be more related to a company's day-to-day operations, depending on the nature of the company.

According to Harris, insurance adjusters, despite having varying levels of decision making power, have generally uniform duties that constitute an important part of the day-to-day production of an insurance company's primary product: transferring risk.  Although the adjusters in Harris each had the power to negotiate on Liberty Mutual's behalf, such power was limited to entering settlements within a predetermined range.  In order to enter a settlement not within that range, an adjuster was required to seek authority up the company chain.

In other words, Harris stood for the principle that in a fairly hierarchical business, fewer employees than previously thought may be classified as exempt.  That is, even employees that perform work traditionally thought to be administrative were nonexempt under Harris when that work does not include policymaking rather than mere adherence to the management policy. 

Although the California Supreme Court chose not to review the Harris decision and issue its own opinion, its choice to depublish the case and deny review makes it clear that the Court of Appeal's analysis in Harris has no further impact beyond the Harris case itself.

 [1] The appellate court's decision was rooted in its interpretation of Wage Order 4-2001, which is substantively indistinct from Wage Order 4-1998.  Wage Order 4-2001, however, describes the administrative exemption in greater detail than its predecessor by incorporating by reference sections of the Code of Federal Regulations.  Examining the language of Wage Order 4-2001 and Federal Regulations former part 541.205, the appellate court held that "work qualifies as administrative when it is directly related to management policies or general business operations.  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 and operations of the business."  Harris v. Liberty Mut. Ins. Co., 2012 WL 2990020, at *5 (Jul. 23, 2012) (internal quotation marks and italics omitted).


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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