Harris v. Superior Court (Liberty Mutual Insurance): Cal. Supreme Court Reverses Insurance Adjuster Exemption Case

Plaintiffs worked as claims adjusters for defendants. They alleged that defendants erroneously classified them as exempt “administrative” employees and sought unpaid overtime. Plaintiffs moved for class certification, and the trial court certified a class of “all non-management California employees classified as exempt by [defendants] who were employed as claims handlers and/or performed claims-handling activities.”

Plaintiffs moved for summary adjudication of defendants’ affirmative defense that plaintiffs were exempt from the overtime compensation requirements under Industrial Welfare Commission (IWC) Wage Order No. 4. Cal. Code Regs., tit. 8, § 11040. Defendants opposed the motion and moved to decertify the class.

The trial court decertified the class in part, depending on then the plaintiffs’ claims arose. For claims arising before October 1, 2000, the trial court granted the motion for summary adjudication on grounds that the Bell v. Farmers Insurance line of cases – Bell v. Farmers Ins. Exchange (2001) 87 Cal. App. 4th 805 (“Bell II”) and Bell v. Farmers Ins. Exchange (2004) 115 Cal. App. 4th 715 (“Bell III”) – compelled a ruling that the claims adjusters were nonexempt “production workers.” The court decertified the class as to all claims arising after October 1, 2000, the effective date of a new Wage Order 4.

Both parties appealed. A divided court of appeal ruled for plaintiffs, concluding that they could not be considered exempt employees under either version of the Wage Order. The court of appeal directed the trial court to vacate its prior order and enter an order granting plaintiffs’ motion for summary adjudication and denying defendants’ motion to decertify.

The California Supreme Court granted defendants’ petition for review. In a unanimous but relatively narrow decision, the Court reversed and remanded to the court of appeal for reconsideration, holding that the “administrative/production worker dichotomy” is not dispositive.

In 1998, the IWC issued a new series of wage orders, abolishing overtime compensation for work over eight hours in a day. In response, the Legislature passed the AB 60, “Eight-Hour-Day Restoration and Workplace Flexibility Act of 1999.” The Act amended Labor Code section 510 to provide overtime compensation for work over eight hours in a day. It also added section 515, which permits the IWC to exempt from overtime compensation executive, administrative, and professional employees, provided that they are primarily engaged in duties that meet the test of the exemption, that they regularly exercise discretion and independent judgment in performing those duties, and that they earn a monthly salary no less than two times the state minimum wage for full-time employees, currently $640 per workweek.

Following passage of AB 60, the IWC issued new wage orders, including Wage Order 4-2001. Whereas Wage Order 4-1998 did not “articulate the precise scope” of the administrative exemption, Wage Order 4-2001 contains “a much more specific and detailed description of work that is properly described as administrative.” Harris, slip op. at 4, 7. The Order provides a multi-pronged test of the exemption. Harris focuses on the first and last factors: that an administrative employee is one whose duties and responsibilities involve “the performance of 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 who is primarily engaged in duties that meet the test of the exemption.

The Wage Order provides that the activities constituting exempt and non-exempt work “shall be construed in the same manner” as in certain regulations under the federal Fair Labor Standards Act in effect as of the date of the order. The relevant regulation provides that work is “directly related to management policies or general business operations” only if it satisfies two components. Fed. Regs. § 541.205(a) (2000). First, it must be qualitatively administrative. Second, quantitatively, it must be of substantial importance to the management or operations of the business. Both components must be satisfied before work can be deemed exempt in nature. Harris, slip op. at 10.

In their motion for summary adjudication, plaintiffs argued that defendants could not show that their work was qualitatively administrative in nature. They argued that they fell on the production side of the administrative/production worker dichotomy, as explained in the Bell cases. The administrative/production worker dichotomy distinguishes between administrative employees who are primarily engaged in “administering the business affairs of the enterprise” and production-level employees whose “primary duty is producing the commodity or commodities, whether goods or services, that the enterprise exists to produce and market.” (Bell II, 87 Cal. App. 4th at p. 821.)

Like Harris, Bell asked whether a class of insurance adjusters could be deemed administrative exempt employees. Examining the role of the plaintiffs in the defendant’s business, the Bell court held that the defendant’s business was to handle claims, the adjusters fell squarely on the production side of the administrative/production dichotomy, and they could not be deemed administrative employees. Bell II, 87 Cal. App. 4th at 826.

The Supreme Court distinguished Bell on two grounds. First, the Bell courts were careful to limit their holdings to the facts before them, including the defendants’ stipulation that the plaintiffs’ work was “routine and unimportant.” Bell II, 87 Cal. App. 4th at 826. “Second, because Wage Order 4-1998 did not provide sufficient guidance, the Bell II court looked beyond the language of the wage order and employed the administrative/production worker dichotomy as an analytical tool.” Harris, slip op. at 17. In contrast, Wage Order 4-2001 provides “detailed guidance” on the issue. Ibid.

Having thus distinguished Bell, the Supreme Court held that the court of appeal erred in placing too much reliance upon it.

First, the court of appeal both failed to consider all of the relevant aspects of the federal regulations incorporated into Wage Order 4-2001 and it “reached out for support” to other regulations not incorporated into the Wage Order. Harris, slip op. at 18.

Specifically, the court of appeal focused on former part 541.205(a), concluding that only work performed at the level of policy or general operations can qualify as “directly related to management policies or general business operations” and that work that merely carries out the particular day-to-day operations of the business is production, not administrative, work. Harris, slip op. at 19. The court failed to take into account former part 541.205(b), which provides that “administrative operations of the business” includes work performed by “white-collar employees engaged in ‘servicing’ a business as, for example, advising the management, planning, negotiating, [and] representing the company.” Ibid. The court thus read the phrase “directly related to management policies or general business operations” in too narrow a fashion. Ibid.

Second, the court of appeal erred in relying on Bratt v. County of Los Angeles (9th Cir. 1990) 912 F.2d 1066 to support its conclusion that “although advising management about the formulation of policy is exempt administrative work, advising management about the settlement of an individual claim is not.” Harris, slip op. at 19-20. The Supreme Court distinguished Bratt because the Ninth Circuit more recently held that claims adjusters may be exempt from the Fair Labor Standards Act’s overtime requirements and because Bratt involved probation officers, not claims adjusters. Harris, slip op. at 20. The court of appeal’s reliance on Bratt “highlights the difficulty in relying on the particular role of employees in one enterprise to deduce a rule applicable to another kind of business” and “reveals the limitations of the administrative/production worker dichotomy itself as an analytical tool.” Harris, slip op. at 20-21. The Court held that modern-day, post-industrial, service-oriented businesses may not follow the administrative/production worker dichotomy, and that courts should not strain to apply the dichotomy where it does not fit. Harris, slip op. at 21.

The court of appeal did not err in considering two opinion letters issued by the Division of Labor Standards Enforcement (DLSE): a 1998 letter applying the administrative/production worker dichotomy to find that certain claims adjusters were not exempt; and a 2003 letter stating that the dichotomy is still viable after adoption of Wage Order 4-2001. Harris, slip op. at 21. The Supreme Court stated that its opinion was not inconsistent with the opinion letters.

We do not hold that the administrative/production worker dichotomy was misapplied to the Bell II plaintiffs, based on the record in that case, or 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.

Harris, slip op. at 22.

The Supreme Court thus reversed and remanded with instructions that the court of appeal review the trial court’s denial of the summary adjudication motion, applying the legal standards set forth in the opinion. The Court did not take immediate action in either of the two companion cases, Pellegrino v. Robert Half International, Inc., Case No. S180849 (blogged here) and Hodge v. AON Insurance Services, Case No. S191415 (blogged here). 

The opinion is available here.