The U.S. Ninth Circuit
Court of Appeals has ruled that claims adjusters for Farmers Insurance Exchange
are exempt from overtime under the federal Fair Labor Standards Act
(FLSA)—despite the employees’ allegations that they were misclassified. In so
ruling, the appeals court threw out a $52.5 million judgment that a federal trial
court in Oregon awarded to 1,039 adjusters in Colorado, Illinois, New Mexico,
Oregon, Washington, Minnesota, and Michigan covered by the class action
lawsuit. We’ll explain the ruling and the impact for
Duties of Claims
Adjusters
Farmers’ claims
adjusters are classified, based on their experience, as claims adjusters,
senior claims adjusters, and special claims adjusters. The duties for these
three levels are essentially the same except for the level of authority each
has to settle claims. On any given claim, however, a particular adjuster’s
settlement authority can be raised with supervisor approval. Farmers pays
adjusters on salary, classifying them as exempt from overtime.
Farmers provides all
adjusters with written guidelines and training materials to aid in handling
claims. Some of the guidelines are mandatory; others are recommendations. Claims
adjusters use computer software to help them estimate damage or loss. The
software functions like a price database (similar, for example, to a parts
catalog), and its usefulness depends on the quality of the information the
adjuster develops and feeds in.
Class Action Suit Filed
A group of claims
adjusters sued Farmers under the FLSA, seeking overtime pay for weeks in which
they worked more than 40 hours. Farmers argued that it didn’t owe overtime
because the adjusters qualified for the administrative overtime exemption.
A trial court, however,
concluded that those claims adjusters whose monthly claims payouts were below $3,000
were nonexempt. The trial court reasoned that exempt status hinged in part on
the size of the claims handled. It thus awarded $52.5 million in back overtime to
1,039 of the approximately 2,000 adjusters in the class.
Appeals Court Overturns
Verdict
Now, the Ninth Circuit
has stripped the employees of the award, finding that all of the Farmers claims
adjusters were exempt and therefore not entitled to overtime. The court
explained that the U.S. Department of Labor (DOL) FLSA regulation for the
administrative exemption as applied to insurance adjusters does not distinguish
between adjusters based on the value of the claims they handle.
Under DOL regulations
implementing the FLSA, an employee qualifies for the administrative exemption provided
he or she: 1) earns a salary of at least $455 per week, and 2) his or her
primary duty consists of performing office or nonmanual work directly related to
management policies or general business operations of the employer and includes
the exercise of discretion and independent judgment.
The regulations further
provide that insurance claims adjusters generally meet the primary duty
requirement if their duties involve activities such as interviewing insureds,
witnesses, and doctors; inspecting property damage; evaluating and making
recommendations regarding coverage of claims; and determining liability and
claim value.
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Exercising Discretion
and Independent Judgment
According to the Ninth
Circuit, the Farmers claims adjusters’ duties fell squarely within these
regulations. And even though adjusters needed supervisor approval before
denying a claim or to obtain additional settlement authority, they still
exercised the requisite discretion and independent judgment: “[D]iscretion and
independent judgment did not necessarily imply that the decisions made by the
employee have a ‘finality that goes with unlimited authority and a complete
absence of review,’” the Ninth Circuit said.
The court also noted
that use of software and other written guidance to estimate and handle claims
didn’t limit the exercise of discretion and independent judgment, particularly
because the software could not be used for all losses, and even for those
claims for which the software was applicable, adjusters often still had to make
detailed loss evaluations. What’s more, said the court, the adjusters’
decisions related to significant matters rather than to the routine and
unimportant. For example, an adjuster who set a claim reserve too low could
subject the company to state fines. And, the decisions were important to the
company’s reputation with policyholders and the public.
Limited Impact in
Despite the big win for
Farmers,
employers who are covered by the state’s overtime exemption rules may have a
higher hurdle when it comes to classifying employees under the administrative
exemption. That’s because several years ago, a
opposite conclusion about the exemption status of Farmers claims adjusters. In
that case, the state appeals court determined that the adjusters didn’t qualify
for the California administrative overtime exemption because their duties were
more akin to rank-and-file production work rather than work on an
administrative level. Farmers eventually settled the lawsuit, agreeing to pay
out $210 million. Although the Ninth Circuit criticized this aspect of the
still remains the law here.
_
1 In re Farmers Insurance
Exchange, U.S.C.A. 9th Cir. Nos. 05-35080, 05-35082, 2006