California employers were provided a helpful ruling from the California Supreme Court late last year when it issued its decision in Harris v. Superior Court (Liberty Mutual), rejecting the oft-cited administrative/production worker dichotomy as a dispositive test for determining whether employees qualify for the administrative exemption. The court of appeal had held that insurance company claims adjusters were "production" employees who did not advise on general policies or business operations of the employer, but rather merely carried out the day to day affairs of the business and, as such, could not qualify for the administrative exemption from overtime pay. The California Supreme Court reversed, holding that the court of appeal erred in focusing so heavily on the production worker dichotomy as a dispositive test for excluding application of the exemption. The Court held that the adjusters' duties (as opposed to their general "production" role within the company) had to be examined to assess applicability of the exemption. Notably, the Court cited with approval federal regulations and caselaw suggesting that the exemption may well apply to certain employees, such as claims adjusters, involved in servicing the employer's business. The Court also disapproved of the reasoning of certain cases finding that adjusters did not qualify for the administrative exemption based on the fact that adjusters service the business rather than advising management on policies or general operations. The Supreme Court did not go so far as to decide whether the exemption applied to the adjusters at issue in the case, but instead remanded the case back to the court of appeal to undertake an appropriate examination and revisit whether the administrative exemption applied to the claims adjusters at issue (bearing in mind the guidance and direction of the Supreme Court on the proper focus for the analysis).
Yesterday, the court of appeal issued its decision on remand, surprisingly finding that the adjusters as a whole group (including 39 job classifications of adjusters working for at least two companies in three different lines of business) did not qualify for the administrative exemption as a matter of law. The court's reasoning again focused on the "production" nature of the adjusters' work, with a slight twist. The court explained that it was following Supreme Court guidance by not focusing on the adjusters' production "role," but was instead focusing on the adjusters' "duties," which it viewed as production duties and hence non-exempt. The court held that adjusting individual claims is just carrying out the day to day production work of the company and does not involve advising management on policies or general business operations, much less formulating such policies or operational strategies on their own. The court acknowledged that the adjusters at issue had varying levels of responsibility and authority (some with authority to settle claims for $100,000 while others had lesser authority of $40,000, and some advised management on certain policies while others did not), but the court dismissed these differences as immaterial to the exemption analysis. The court reasoned that regardless of the amount of their authority, all adjusters' duties were to adjust individual claims and that simply is not "administrative" work at the level of policy or general operations. Furthermore, even though some adjusters may have advised management some of the time, which might qualify as administrative work, they would have to engage in this work the majority of their work time in order to qualify for the administrative exemption.
So, what about the federal regulations and caselaw cited with approval by the California Supreme Court, suggesting adjusters may well qualify for the exemption? As noted, one federal regulation specifically cites claims adjusters as an example of the type of service employee who may qualify for exemption. Similarly, the Supreme Court cited with approval a Ninth Circuit case (Miller v. Farmers Insurance) holding that adjusters were exempt based on their duties of interviewing witnesses, determining coverage and value of claims, determining fault, and negotiating settlements. The Supreme Court also noted that many other federal cases are in accord with Miller and that these cases are "instructive." Well, notwithstanding the fairly clear import of the Supreme Court's statements, the court of appeal on remand simply dismissed all of this authority as "not persuasive."
The court of appeal's decision on remand in Harris is a very unfavorable one for California employers, given the court's very narrow interpretation of the administrative exemption. Stay tuned for yet another likely petition for review to the California Supreme Court. Our prior post on the Supreme Court's decision in Harris is here. The court of appeal's decision on remand is here.