More than 4 years after agreeing to review a state Court of Appeals ruling that dramatically narrowed the scope of the administrative exemption, the California Supreme Court has reversed the decision. Although the high court declined to provide a definitive answer on whether the insurance claims adjusters in the case were—or were not—exempt, it rejected the appellate court’s analysis of the issue.

The Supreme Court’s opinion sheds some new light on just who is covered by the administrative exemption but also leaves some questions unanswered.

Claims Adjusters File Overtime Class Actions
The plaintiffs in the case are claims adjusters employed by Alhambra-based Liberty Mutual Insurance Company and San Diego-based Golden Eagle Insurance Corporation. They filed four class-action lawsuits alleging that the employers erroneously classified them as exempt administrative workers and should have paid them overtime.

The Court of Appeals held that the claims adjusters couldn’t be considered administratively exempt “as a matter of law”—meaning there was no way a jury would find that the adjusters were administrative workers, so it wasn’t necessary to take the issue to trial. The employer appealed this decision.

The Administrative Exemption
Wage Order 4-2001, which governs the wages and hours of employees in “Professional, Technical, Clerical, Mechanical, and Similar Occupations,” provides an exemption from the overtime compensation requirements for administrative work. The exemption is an affirmative defense—that is, an employer can defeat an employee’s wage and hour claim by proving that the employee is exempt.

To show that an employee qualifies for the administrative exemption, an employer generally must show all of the following:

1. The employee’s duties and responsibilities involve performing office or nonmanual work directly related to management policies or general business operations.

2. The employee customarily and regularly exercises discretion and independent judgment.

3. The employee either:

• regularly and directly assists an executive or administrative employee, or
• under only general supervision:
  • performs work requiring special training, experience, or knowledge, or
  • executes special assignments and tasks
    

4. The employee spends more than 50 percent of his or her time on exempt duties. (The federal test requires only that the “primary duty” of the employee falls within the exempt duties.) Exempt duties include planning, negotiating, representing the employer, purchasing, and advising management. Nonexempt duties include clerical work, making deliveries, and operating equipment.

5. The employee’s monthly salary is at least double the state minimum wage for full-time employment. (Currently, an administrative employee must earn a monthly salary of at least $2,773.33 per month.)

The Court of Appeals based its decision solely on the so-called “administrative/production worker dichotomy.” It ruled that only work performed at the level of policy or general operations qualifies as work “directly related” to management policies or general business operations. Work that merely carries out the business’ particular day-to-day operations is production work and cannot be exempt.

Because the claims adjusters serviced individual cases and provided no input on their employers’ general policies or operations, the Court of Appeals concluded that they were nonexempt production workers.

California Supreme Court Objects
The Supreme Court disagreed, finding that the administrative/production dichotomy has been superseded by more specific and detailed statutes and regulations. It also noted the impracticality of applying such a test in the 21st century:  “Because the dichotomy suggests a distinction between the administration of a business on the one hand, and the ‘production’ end on the other, courts often strain to fit the operations of modern-day post-industrial service-oriented businesses into the analytical framework formulated in the industrial climate of the late 1940s.”

The Supreme Court instead turned to more recent statutes and regulations for guidance. It explained that, under those, work qualifies as “directly related” only if it is both qualitatively and quantitatively administrative. The qualitative component requires the work to be administrative in nature; it includes work done by white-collar workers engaged in servicing a business. The quantitative component requires it to be of “substantial importance to the management or operations of the business.”

The employees in this case challenged only the qualitative component, arguing that the employers didn’t show that their work was administrative in nature. Because the directly related test is a two-parter, they only needed to show that the employers couldn’t prove one part to win their pre-trial motion against the employers’ defense.

The Supreme Court ultimately sent the case back to the appellate court to determine whether the adjusters’ actual duties were administrative in nature. The court stressed that it was ruling only that the administrative/production worker dichotomy is not the decisive test. It also did not provide guidance on how to determine if a white collar worker satisfies the quantitative component of the directly related test, as that component wasn’t in dispute in this case.

The Supreme Court did, however, note that the federal Ninth Circuit Court of Appeals, which covers California, has held that claims adjusters are exempt under the federal Fair Labor Standards Act’s overtime provisions if they perform such activities as interviewing witnesses, making recommendations on coverage and value of claims, determining fault, and negotiating settlements.

The Takeaway for Employers
While the high court’s reversal of the Court of Appeals’ narrow interpretation of the administrative exemption is good news for employers, it provided little in the way of definitive rules on how to apply the exemption.

One thing is certain, though: the question of administrative exemptions will be determined on an individualized, case-by-case basis. If you want to reduce the odds of costly class action litigation, take the time to review your worker classifications, checking the actual job duties against the elements of the relevant exemption. Harris v. Superior Court, Calif. Supreme Court No. S156555, (2011).

Practice Tip: California’s tests for exemptions from wage and hour laws are significantly stricter than those under federal law.