California Supreme Court Finds the "Administrative/ Production Worker Dichotomy" Not Dispositive in Determining Insurance Claims Adjusters Exempt

In a long-awaited decision, the California Supreme Court unanimously gave California employers a holiday present in an opinion that follows the majority of federal courts in finding that insurance claims adjusters are exempt administrative employees.

At issue in Harris v. Superior Court was the exempt status of a certified class of Liberty Mutual insurance claims adjusters who the California Court of Appeal found did not satisfy the requirements of the administrative exemption as a matter of law. Under California law exempt administrative employees must receive a minimum compensation of not less than two times the minimum wage, and also (1) perform office or non-manual work “directly related to management policies or general business operations of his/her employer or his/her employer’s customers,” and (2) “customarily and regularly exercise discretion and independent judgment.”

The administrative exemption has been one of the most hotly-contested and litigated of California’s overtime exemptions. This decision provides more clarity on the application of the exemption, and the role of the “administrative/production worker dichotomy” as an analytical tool in assessing exempt status.

In Harris, the California Supreme Court overruled the Court of Appeal, which held that the claims adjusters were “production” workers because their work “ investigating claims, determining coverage, setting reserves, etc. is not carried on at the level of policy or general operations, so it falls on the production side of the dichotomy.” Thus, the lower appellate court concluded, they did not perform in a role that was “directly related to management policies or general business operations” and were therefore not exempt administrative employees. The California Supreme Court disagreed.

First, the court rejected the Court of Appeal’s almost exclusive reliance on the administrative/production worker dichotomy analysis. The rigid application of this analysis, the court stated, ignores the limitations of the dichotomy and results in a “strained attempt to fit the operations of modern-day post-industrial service-oriented businesses into the analytical framework formulated in the industrial climate of the late 1940s.” The court clarified, however, that it was not holding 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.”

Second, the court clarified that under the federal regulations California looks to for guidance in applying state exemption classifications, work that is “directly related to management policies or general business operations” includes “advising management, planning, negotiating, and representing the company.” The court admonished the Court of Appeal for interpreting this prong of the administrative exemption too narrowly. In other words, work may be directly related to management policies or general business operations even if it is not performed at the corporate policy level. In this regard the court pointed out that the Ninth Circuit and other federal courts, applying recent applicable federal regulations, have determined claims adjusters satisfy the administrative exemption under the Fair Labor Standards Act “if they perform activities such as interviewing witnesses, making recommendations regarding coverage and value of claims, determining fault and negotiating settlements.”

Third, the court emphasized the importance of assessing the language of the relevant statutes and wage orders as applied to the particular facts of each case, noting “the difficulty in relying on the particular role of employees in one enterprise to deduce a rule applicable to another kind of business.”

The Harris decision therefore is a victory for Liberty Mutual, but it is also a good reminder to California employers of the importance of reviewing the particular circumstances and actual job duties of their exempt administrative employees – as well as their other exempt employees – not just relying on their job descriptions to determine that the exempt classifications are appropriate.

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Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.