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Review exempt/nonexempt status in wake of court decision on administrative exception

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in Management Training

Good news for employers: The Court of Appeal of California has found that claims adjusters are exempt administrative employees not entitled to overtime. The court rejected the notion that all claims adjusters who work for insurance companies are nonexempt employees without regard to the work they actually perform.

Although this decision directly involved the insurance industry, it has important implications for employers throughout California. It means employees in other industries will now find it harder to argue that they do not qualify for the administrative exemption if they perform work their employer was established to provide.

Recent case: Kenneth Hodge brought a class-action lawsuit on be­half of claims adjusters employed in California against the national risk management firm Cambridge Inte­grated Services. The suit challenged the adjusters’ exempt classification, arguing they should be nonexempt and eligible for overtime.

Cambridge adjusters are involved in assessing complex litigated claims and they’re responsible for millions of dollars of their clients’ money. They regularly interact with clients, lawyers, doctors and other professionals. They draw independent conclusions. They have discretion to make decisions about appropriate compensation, using their professional judgment, specialized training, experience and skills.

In analyzing whether these employees were exempt under Cali­for­nia Wage Order 4, the court found that adjusters—whose duties include setting substantial financial reserves that are critically important to Cambridge—qualify for exempt status. It said adjusters exercise the judgment and discretion required by the administrative exemption.

Even though the work of Cam­bridge’s adjusters arguably could be considered “production” work because claims adjusting is the very work that the company exists to perform, the court looked beyond the so-called “production/administrative” dichotomy. It noted that production is but one measure to use when deciding whether a job qualifies for the administrative exemption.

The court looked first at adjusters who perform work for clients not in the insurance industry. It noted that if Kmart, a retailer whose “production” workers sell consumer goods, has in-house claims adjusters who perform exempt administrative duties, they would clearly not be performing the production work of Kmart. The fact that Kmart may outsource such claims adjusting work to an insurance company (such as Cambridge) does not render the administrative exemption unavailable to workers employed by Cambridge, who perform the exact same duties as Kmart’s in-house adjusters.

Thus, the case stands for the im­portant—and commonsense—proposition that work for a client that would qualify under the administrative ex­emption for that client does not become nonexempt production work by virtue of the fact that the employer is in the business of providing that serv­ice to the client.

The court concluded that the adjusters who performed work for insurance-related entities qualified for the administrative exemption. It focused on the actual work the adjusters performed, notably the fact that they develop litigation strategies and set reserves that may total in the millions of dollars.

The court concluded that this work involved the exercise of judgment and discretion on matters of significant monetary import to the insurance com­pany clients, and therefore the administrative exemption was available. (Hodge v. Aon Insurance Services, No. B217156, Court of Appeal of California, 2nd District, 2011)

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