The federal Fair Labor
Standards Act (FLSA) and
certain administrative employees from overtime; the requirements for the
administrative exemption under
law are stricter than the FLSA. To qualify for this exemption in California, an
employee must: 1) earn a salary equal to at least twice the state minimum wage;
2) perform office or nonmanual work directly related to the management policies
or general business operations of the employer or customers; 3) customarily and
regularly exercise discretion and independent judgment; 4) regularly and
directly assist a proprietor, manager, or exempt administrator; perform under
only general supervision work along specialized or technical lines requiring
special training; or execute special assignments and tasks under only general
supervision; and 5) engage in exempt work more than 50 percent of the time.
Now, a
scope.1 The lawsuit involved
insurance claims adjusters who alleged that their employer, Liberty Mutual
Insurance Co., improperly classified them as administrative employees, thus
denying them overtime compensation. Liberty Mutual argued that it properly
classified the claims adjusters as exempt. Siding with the claims adjusters,
the appeals court ruled that they were nonexempt employees.
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‘Administrative’ Versus ‘Production’
To reach its decision,
the appeals court focused on only one element of the administrative exemption: whether
the claims adjusters performed work that would be considered “directly related
to management policies or general business operations” of the company. The
court reasoned that this element has two components: 1) the work must be of a
particular type (administrative rather than production work); and 2) the work
must be of substantial importance
to the management or
operation of the business. The court then broadly concluded that only work
performed at the level of policy or general operations can qualify as being “directly
related to management policies or general business operations.”
Claims Adjusters Were
Nonexempt
The appeals court
reasoned that the adjusters primarily performed work that falls on the
production side rather than the administrative side, and were thus nonexempt.
The adjusters investigated and estimated claims, made coverage determinations, set
reserves, negotiated settlements, made settlement recommendations for claims
beyond their authority, and identified potential fraud. This type of work, the
court determined, is part of the day-to-day operation of Liberty Mutual’s
business, not part of its general business operations, and therefore is
nonexempt work. The claims adjusters were therefore not exempt administrative employees
and were entitled to overtime pay, ruled the court.
What Does This Mean for
This case will likely be
appealed to the California Supreme Court. In the meantime, employers should be aware
of this decision and apply the administrative exemption with caution. To be
safe, employers should try to:
• Carefully consider
whether the administrative exemption applies. A different exemption, such as
the executive exemption,
may actually be more appropriate for a particular employee.
• Carefully review the
duties of employees classified as exempt under the administrative exemption to
ensure that they are engaged in tasks relating to higher-level management
policy and operations, as opposed to tasks relating to carrying out the employer’s
day-to-day business.
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1 Harris v. Superior
Court (
B195121, 2007