Harris v. Superior Court (Liberty Mutual): On Remand, Court of Appeal Again Reverses Orders Decertifying Class and Denying Plaintiffs' Motion for Summary Judgment of Exemption Defense

In Harris v. Superior Court (Liberty Mutual Ins. Co.) (2011) 53 Cal.4th 170 (discussed here), a unanimous California Supreme Court held that that the “administrative/production worker dichotomy” is not dispositive of the administrative exemption defense. 

On remand, the Court of Appeal has held once again that the trial court (Los Angeles Superior, Judge Carolyn B. Kuhl) erred in granting the defendants' motion to decertify the class and in denying the plaintiffs' motion for summary judgment on the administrative exemption defense.  

Here's the Court's summary, which describes the ruling pretty clearly: 

Employers claim that the administrative exemption to the overtime compensation requirements applies to claims adjusters.  Adjusters claim that the exemption does not apply.  In addition, Adjusters contend that the issue of whether their work duties are of the kind required for application of the administrative exemption is a predominant issue common to the claims of all putative class members, warranting class certification.  The trial court initially agreed and certified Adjusters' proposed class.  Later, however, the court revisited the issue and decertified the class for all claims arising after October 1, 2000, on the ground that under Wage Order 4-2001, but not under Wage Order 4-1998, the work duties issue is neither dispositive nor a predominant issue that would justify class treatment of Adjusters' claims.  

Both sides petitioned for writ review.  Employers seek decertification of the portion of the class that remains certified.  Adjusters seek recertification of the decertified portion of the class and also challenge the trial courts denial of their motion for summary adjudication of Employers' affirmative defense based on the administrative exemption.  We grant Adjusters' petition and deny Employers' petition because Adjusters' primary work duties are the day-to-day tasks of adjusting individual claims not directly relating to management policies or general business operations. 

Slip op. at 3.  Here's my more detailed review: 

Overview of California and Federal Regulations.  

The 2001 series of Wage Orders incorporates the Federal regulations -- as they existed as of January 1, 2001 -- into the definition of what work meets the test of the exemption.  "So, just as the statute is understood in light of the wage order, the wage order is construed in light of the incorporated federal regulations."  Slip op. at 8. 

Parsing the language of the regulation reveals that work qualifies as "administrative" when it is "directly related" to management policies or general business operations.  Work qualifies as "directly related" if it satisfies two components.  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 considered "directly related" to management policies or general business operations in order to meet the test of the exemption.  (Fed. Regs. § 541.205(a) (2000).) 

Slip op. at 9-10.  At issue in Harris is whether the adjusters' work satisfies the "qualitatively administrative" requirement of the "directly related" test.  Ibid.  

Wage Order 4-1998 and the Federal Regulations.  

Next, the Court explained that the Federal regulations -- which are not incorporated into the 1998 wage orders -- none-the-less guide the Court's interpretation of the 1998 wage orders.  

Accordingly, because we conclude that the same federal regulations that are incorporated into Wage Order 4-2001 must be used as a guide to interpreting Wage Order 4-1998, we agree with the parties that the analysis of the administrative exemption should be the same under both wage orders.

Slip op. at 11.  

The Qualitative Component of the “Directly Related” Requirement

Under the federal regulations ... an employee's work duties meet the test of the exemption only if they "relat[e] to the administrative operations of a business as distinguished from "production" or, in a retail or service establishment, 'sales' work" (Fed. Regs. § 541.205(a) (2000)), but the import of that statement is not perfectly clear.  We take it to mean that only duties performed at the level of policy or general operations can satisfy the qualitative component of the "directly related" requirement.  In contrast, work duties that merely carry out the particular, day-to-day operations of the business are production, not administrative, work.

Slip op. at 11-12 (emphasis added).  An employee who is primarily engaged in work that is not "directly related to the administrative operations of a business" cannot fall under the administrative exemption.  Ibid.  

Application of the Qualitative Component of the “Directly Related” Requirement

The undisputed evidence showed that the adjusters are not exempt employees because they are "primarily engaged in work that fails to satisfy the qualitative component of the 'directly related' requirement because their primary duties are the day-to-day tasks involved in adjusting individual claims."  Slip op. at 13.  This non-exempt work includes investigating and estimating claims, making coverage determinations, setting reserves, negotiating settlements, making settlement recommendations for claims beyond their settlement authority, and identifying potential fraud.  

This work is not carried on at the level of management policy or general operations.  Administratively exempt work would include, for example, serving on committees to develop company policies and practices.  Defendants' summary judgment fails because defendants did not show that any class members spent more than 50% of their time engaged in such work.  Slip op. at 14.  

The undisputed facts show that Adjusters are primarily engaged in work that fails to satisfy the qualitative component of the "directly related" requirement. Adjusters therefore are not primarily engaged in work that is "directly related to management policies or general business operations." Accordingly, Adjusters cannot be exempt administrative employees under either Wage Order 4-1998 or Wage Order 4-2001.

Slip op. at 15.  

Application of Federal Regulations Former Part 541.205(b) (2000)

Federal Regulations former part 541.205(b) (2000) provided: 

The administrative operations of the business include the work performed by so-called white-collar employees engaged in "servicing" a business as, for[] example, advising the management, planning, negotiating, representing the company, purchasing, promoting sales, and business research and control.

Defendants argued that the Adjusters are exempt because they are engaged in this type of work.  The Court rejected this argument, holding that "not all activities that involve advising management, planning, negotiating, and representing the company satisfy the qualitative component of the 'directly related' requirement."  Slip op. at 16.  The Court then held: "Because Employers make no attempt to specify where the line should be drawn, let alone to show that Adjusters' work falls on the proper side, their argument fails."  Slip op. at 17.  

This holding would appear to have fairly broad application to other professions, and the Court used the example of legal secretaries to illustrate the point.  Legal secretaries perform many of the types of work described in the regulation, but "it is difficult to see how any of that secretarial work could constitute work that is 'directly related to management policies or general business operations.'"  Slip op. at 18.  

The Court then emphasized an important point that it undoubtedly hopes will help insulate its ruling from further review before the California Supreme Court: 

The Supreme Court observed that "the one element of the administrative exemption" that is at issue in these proceedings concerns "the character of [Adjusters'] duties," and the court pointed out that the analysis in the Bell cases was based on the plaintiffs' role in their employer's business and consequently did not address the character of those plaintiffs' duties. Nowhere in this opinion do we in any way rely upon the Bell cases, and our discussion of Employers' argument concerning Federal Regulations former part 541.205(b) (2000) concerns only Adjusters' duties and is entirely independent of Adjusters' role in Employers' business. 

Slip op. at 19 (internal citations omitted).  

Producing the Employer’s Product

"Employers argue that Adjusters do not produce Employers' product because Employers' product is the transference of risk, not claims adjusting."  Slip op. at 19. The Court rejected this argument for two reasons: first, because adjusting claims is "an important and essential part of transferring risk;" and second, because "workers who do not produce their employer's product can still do work that fails to satisfy the qualitative component of the 'directly related' requirement."  Slip op. at 20.  

The Court here demonstrates the Supreme Court's point that the production worker / administrative dichotomy does not always work.  The Court again uses the example of the legal secretary.  He or she does not produce the law firm's product -- legal advice -- but he or she also does not perform work that is directly related to the firm's management policies or general business operations.  Slip op. at 21.  

Effect of Federal Regulations Former Part 541.205(c)(5) (2000)

Federal Regulations former part 541.205(c) (2000) provided: 

The test of "directly related to management policies or general business operations" is also met by many persons employed as advisory specialists and consultants of various kinds, credit managers, safety directors, claim agents and adjusters, . . . and many others.  

Defendants again argued that the Adjusters are exempt because they are engaged in this type of work.  The Court rejected the argument, holding that this regulation is related to the quantitative element of the "directly related" requirement, and the Supreme Court has already held that only the qualitative element is at issue.  Slip op. at 22.  

Agency Opinion Letters and Federal Case Law

The Court declined to follow opinion letters from the DOL or the DLSE.  It also declined to follow district court cases.  Slip op. at 22-24.  

The Alleged Heterogeneity of the Class

Finally, the Court addressed the Defendants' argument that "the qualitative component of the "directly related" requirement cannot be dispositive, and class treatment cannot be appropriate because the certified class is so heterogeneous." Slip op. at 24.  The Court dismissed this argument, again relying on its conclusion that "no evidence shows that any class members primarily engage in work at the level of management policy or general business operations."  Slip op. at 24.  In other words, absent evidence that any class members are subject to the administrative exemption, the Defendants' exemption defense fails.  And that is a predominant issue common to the class members.  Slip op. at 25.  

Conclusion

The parties do not disagree as to Adjusters' work duties. Indeed, the evidence is essentially undisputed as to what those duties are. We hold that, with the few exceptions we have noted, Adjusters' work duties do not satisfy the qualitative component of the "directly related" requirement because they are not carried on at the level of policy or general business operations. Adjusters therefore are not primarily engaged in work that is "directly related to management policies or general business operations." (Fed. Regs. § 541.205(a) (2000).) It follows that Adjusters are not exempt administrative employees under either Wage Order 4-1998 or Wage Order 4-2001. Accordingly, Adjusters' motion for summary adjudication should have been granted, and, because the qualitative component of the "directly related" requirement is a predominant common issue under both wage orders, Employers' motion for class decertification should have been denied in its entirety.

Slip op. at 25-26. Defendants undoubtedly will petition the California Supreme Court for review, and it will be very interesting to see how the Supreme Court responds.  

As I said regarding the Supreme Court's decisions in Harris and Brinker, this court seems to be looking for its identity, at least in employment law cases.  Perhaps by the time Harris goes back up -- if it does go back up -- this Court will have a better sense of how it is going to approach and resolve employment cases and it will give us a more definitive decision than it did the first time around.  On the other hand, perhaps the Court of Appeal has done enough to satisfy the concerns raised by the Supreme Court the first time around, and the Supreme Court will deny review.  

The opinion is available here.