Exempt Employees: Claims Adjusters Don’t Qualify for Administrative Exemption, Says Court; Making Sense of ’Administrative’ vs. ’Production’ Duties

Last month, we discussed
a California
appeals court decision holding that a software consultant was not exempt from
overtime, in part because his duties were more “production” than “administrative.”
This month, we’ll examine a different California appeals court case that came
to a similar conclusion in another class action suit filed by insurance claims
adjusters for Liberty Mutual Insurance Co. We’ll also explain in more detail
what these production and administrative labels mean to courts and why they are
important when you’re classifying employees.

Adjusters Seek Overtime

Liberty Mutual’s exempt
claims adjusters regularly investigated and estimated claims, made coverage determinations,
negotiated settlements and made settlement recommendations, and identified
potential fraud. The claims adjusters sued Liberty Mutual, seeking overtime pay
they claimed they were entitled to as nonexempt workers. Liberty Mutual
countered that the employees were covered by the administrative exemption and
were therefore not entitled to overtime pay.

The HR Management & Compliance Report: How To Comply with California Wage & Hour Law, explains everything you need to know to stay in compliance with the state’s complex and ever-changing rules, laws, and regulations in this area. Coverage on bonuses, meal and rest breaks, overtime, alternative workweeks, final paychecks, and more.

Two Primary Duty
Requirements to Satisfy Exemption

Now a California
appeals court has concluded that the adjusters were not exempt from California’s overtime requirements.1 The court explained the
basic rule that individuals employed in administrative, executive, or
professional capacities are exempt from overtime pay requirements.

The administrative
exemption requires that an employee’s primary duty be “directly related to
management policies or general business operations.” The court said this means
an employee’s primary duty must comprise both of the following:

1. administrative, as
opposed to production, work

2. work of substantial
importance to managing or operating the business

I N FUTURE ISSUES

Adjusters Perform
Production Work, Concludes Court

The appeals court said
that only work performed at the policy or general operations level
can qualify as “directly related to management policies or general business
operations.” In contrast, work that merely carries out the particular,
day-to-day operations of the business is production, not administrative, work.
The court noted that the duties the claims adjusters regularly performed here—claims
adjusting, investigating, making coverage determinations, and negotiating
settlements— were clearly day-to-day production tasks.

While advising
management about policy formulation would be exempt administrative work, said
the court, advising management about settling an individual claim was not. Even
if some of the adjusters might have performed some work at the policy or
general operations level, there was no evidence that even a single plaintiff
primarily engaged in such work.

Production of Company
Product Not Essential

Liberty Mutual also
argued that the adjusters didn’t produce any product for Liberty Mutual, as the
company’s product was the transference of risk (paying claims), not claims
adjusting. The court rejected this argument as well. First, said the court,
adjusting claims is an important part of transferring risk. The adjusters directly
engaged in transferring risk and thus were part of producing this product.

Second, producing the
employer’s product is not a necessary condition for performing production, as opposed
to administrative, work. The court used the example of a law firm secretary,
who does not produce the firm’s product (legal advice) but whose work is nonetheless
nonexempt production work because it has nothing to do with policy or general
operations and instead relates entirely to the firm’s day-to-day affairs.

Practical
Recommendations

This case is a helpful
reminder for employers to look at the big picture when analyzing whether a worker
falls under the administrative exemption—both in terms of what the worker does
(what are the tasks the person spends most of his or her time doing?) and what
the worker contributes to the company (assistance with day-to-day affairs vs.
work at a general or policy level).

Also, don’t forget that
this production/administrative distinction is just one
of the factors courts look at when determining whether
a worker falls under the administrative
exemption.

_

1 Harris v. Superior
Court (Liberty Mutual), Calif. Court of Appeals (Dist. 2) No. B195121, 2007