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California Supreme Court clarifies administrative employee exemption

by on
in Human Resources,Overtime Labor Laws

by Robert A. Jones, Esq.

The California Supreme Court has issued a long-awaited decision in a case addressing the “administrative/production worker” dichotomy in determining if an employee meets the requirements for the administrative employee exemption from overtime under the California Wage Orders.

In a limited but unanimous opinion, the state’s high court reversed and remanded a lower court ruling that held that certain insurance company claims adjusters are not exempt employees. Thus, they were entitled to overtime compensation under the California Labor Code and regulations of the California In­­dustrial Wel­­fare Commission (IWC). The case is Harris v. The Superior Court of Los Angeles County (No. S156555, Supreme Court of California, 2011).

Exempt or not?

A group of claims adjusters em­­ployed by Liberty Mutual Insur­­ance and Golden Eagle Insur­­ance filed four class-action lawsuits (later consolidated into one suit) alleging that their em­­ployers in­correctly classified them as exempt administrative em­­ployees. The suit sought damages for unpaid over­­time work.

The trial court certified a class of all nonmanagement California em­­ployees classified as exempt by Liberty Mutual and Golden Eagle who were employed as claims handlers or performed claims-handling activities.

The trial court later decertified the class in part, depending on whether the adjusters’ claims arose before or after Oct. 1, 2000, the date the IWC replaced an earlier version of Wage Order 4.

On review, the Court of Appeal concluded that, under the terms of that wage order, the claims ­adjusters could not be considered exempt employees, either before or after the order’s amendment. The case eventually reached the California Supreme Court.

The California Labor Code

Under the California Labor Code, to qualify as an exempt administrative employee:

  • Employees must be paid at a certain level.
  • Their work must be administrative.
  • Their primary duties must involve that administrative work.
  • They must discharge those primary duties by regularly exercising independent judgment and discretion.

The issue in this case involved the second point—whether the employees’ work is administrative—in light of the state labor code, the applicable wage orders and incorporated regulations listed in the federal Fair Labor Standards Act (FLSA).

To argue that the test for the administrative exemption could not be met, the claims adjusters emphasized the “administrative/production worker” dichotomy, which was applied by the court in Bell v. Farmers Ins. Exchange (2001 and 2004).

The California Supreme Court found that, while the use of the dichotomy test is still viable in very limited cases, the proper test is a two-part examination to determine if the work performed by the employee is “directly related” to management policies or general business operations as required by the federal regulations specifically incorporated into the Wage Orders by the IWC.

That two-part test is that the work:

  1. Must be qualitatively administrative, and
  2. Quantitatively, it must be of substantial importance to the management or operations of the business.

The California Supreme Court found that the Court of Appeal erred in finding that the claims adjusters were nonexempt under the “qualitative” portion of the test. It reversed and remanded the case for the court to examine the remaining “quantitative” portion of the test with respect to the work performed by the employees.

The justices avoided the opportunity to provide a much-needed detailed analysis of how the lower courts should generally apply the administrative exemption.

Practical impact

While not an outright win for em­­ployers, the strict application of the administrative/production dichotomy test appears to have been effectively disposed of. That should make it ­easier for employers to qualify em­­ployees for the administrative exemption along the lines of what the federal FLSA currently requires.


Author: Robert A. Jones is Of Counsel in Ogletree Deakins’ San Francisco office. Contact him at (415) 442-4810 or robert.jones@ogletreedeakins.com.

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