California Supreme Court Applies Administrative Exemption to Claims Adjusters

In the waning days of 2011, a unanimous California Supreme Court gave California employers a holiday present in its long-awaited opinion that diminishes the importance of the outmoded analytical tool known as "the administrative/production worker dichotomy" for determining whether employees are properly classified as exempt "administrative" employees for the purposes of wage and hour law. In its decision in Harris v. Superior Court (Liberty Mutual), the court re-establishes the necessity of analyzing all aspects of the administrative exemption and emphasizes the relevance of federal law in interpreting the exemption. As a result, the decision could help California employers relying upon the administrative exemption.

At issue in Harris v. Superior Court was the exempt status of a certified class of Liberty Mutual insurance claims adjusters, who the lower appellate court found were not exempt as a matter of law under the administrative exemption. If employees fall within the "administrative exemption" under California law, they are exempt from California laws requiring payment of overtime, minimum wage, and from meal/rest break obligations.1

As explained by the California Supreme Court, the administrative exemption applies to employees who: (1) are paid at least twice the minimum wage; (2) perform administrative work, defined as office or non-manual work "directly related to management policies or general business operations of his/her employer or his/her employer's customers;" (3) have primary duties that involve that administrative work; and (4) discharge those primary duties by "customarily and regularly exercising discretion and independent judgment."2 Wage Order 4-2001 directs that whether work is considered exempt "shall be construed in the same manner as such terms are construed in [certain] regulations under the Fair Labor Standards Act . . . ." Since Wage Order 4-2001 incorporates certain federal regulations, at issue was whether those regulations affected the interpretation of California's exemption.

The "Administrative/Production Worker Dichotomy:" Dispositive Or Outmoded Analytical Tool?

The scope of California's administrative exemption has been one of the most hotly-contested and litigated of California's overtime exemptions, particularly since the exemption is not defined identically to the federal administrative exemption. Employers were hoping that this decision would provide more clarity on California's exemption, particularly regarding whether the "administrative/production worker dichotomy" analytical tool should be used, and, if so, how.

In Harris, the appellate court used the "administrative/production worker dichotomy" and did not consider whether the claims adjusters met any other aspect of the administrative exemption—particularly whether they spent more than half their time performing exempt tasks. The appellate court concluded that the claims adjusters were mere "production" workers because their obligation was to investigate, adjust and settle claims—arguably the mere "production work" of an insurance company.

The California Supreme Court Reversed the Employees' Victory, Distinguishing the "Administrative/Production Worker Dichotomy"

The California Supreme Court rejected this analysis, sending the case back to the lower court for further proceedings, including a possible trial and a re-examination of whether...