Last December, the California Supreme Court reversed a state Court of Appeals ruling that had dramatically narrowed the scope of the administrative exemption. Although the high court declined to definitively answer whether the insurance claims adjusters in the case were exempt, it rejected the appellate court’s analysis of the issue and returned the case to the lower court to reconsider.

The Court of Appeals did just that and has released a new opinion—one that essentially reinstates its original position and seems to fly in the face of the Supreme Court’s position on how you determine whether the administrative exemption applies.

Claims adjusters seek overtime
The plaintiffs in the case are claims adjusters for 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 originally 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 employers appealed this decision.

The Supreme Court weighs in
The Court of Appeals based its decision solely on the so-called “administrative/production worker dichotomy.” It found that only work performed at the policy or general operations level qualifies as work “directly related” to management policies or general business operations, as the exemption requires. Work that simply carries out the business’s particular day-to-day operations is nonexempt production work.

The state Supreme Court held that this dichotomy has been superseded by more specific and detailed statutes and regulations. Under those, work qualifies as “directly related” only if it is both qualitatively and quantitatively administrative, the high court explained.

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, asserting that the employers didn’t show that their work was administrative in nature.

The Supreme Court ended up returning the case to the appellate court to determine whether the adjusters’ duties were administrative in nature.

The Court of Appeals holds its ground
The Supreme Court clearly held that the administrative/production worker dichotomy is not the decisive test for the administrative exemption. Nevertheless, the Court of Appeals again declared that an employee’s duties must meet the “directly related” test only if they relate to an employer’s administrative operations, as distinguished from production duties that carry out the day-to-day operations.

Citing the federal regulations for the Fair Labor Standards Act (FLSA) for support, the appellate court then reiterated that only duties performed at the policy or general operations level can satisfy the qualitative component.

But, as the Supreme Court pointed out, the federal 9th  Circuit Court of Appeals, which covers California, has held that claims adjusters are exempt under FLSA’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 appellate court didn’t even address this case in its opinion.

It did acknowledge a 2002 opinion letter issued by the U.S. Department of Labor that concluded that claims adjusters are exempt administrative employees under the FLSA. The court simply dismissed it as unpersuasive, though.

The adjusters are nonexempt
The Court of Appeals found that the adjusters here were primarily engaged in work that does not satisfy the qualitative component because their primary duties were the day-to-day tasks involved in adjusting individual claims. The employer’s product is risk transference, it said, and claims adjusting is an essential part of transferring risk.

The court stated that the adjusters investigate and estimate claims, make coverage determinations, set reserves, negotiate settlements, make settlement recommendations for claims beyond their settlement authority, identify potential fraud, and the like. The court determined, though, that none of that work was carried out at the level of management policy or general operations. Rather, it was all part of the day-to-day operation of the business.

The court conceded that an adjuster could be administratively exempt in some cases. For instance, if the insurance employer’s underwriters consult with the adjusters regarding whether the company should offer certain types of policies in general, as part of its line of products, the adjusters are giving advice about management policies or general operations.

On the other hand, if an underwriter consults with an adjuster regarding whether the company should issue certain types of policies to a particular customer, the adjuster is not giving advice about management policies or general operations. Harris v. Super Ct. (Liberty Mutual Ins. Co.), Calif. Court of Appeals (Dist. 2) No. B195121 (2012).

What now?
The Court of Appeals’ ruling was greeted with surprise in the legal community. The decision is widely expected to be appealed again to the California Supreme Court. In the meantime, your best bet in light of this unfavorable ruling is to err on the side of a narrow interpretation of the administrative exemption.

Practice Tip: The Court of Appeals’ decision leaves a lot of uncertainty when it comes to determining whether the administrative exemption does—or does not—apply.