California Supreme Court Issues Long Awaited Administrative Exemption Decision
Today the California Supreme Court issued its decision in Harris v. Superior Court (Liberty Mutual Insurance Co.), a case addressing whether insurance claims adjusters qualify for the administrative exemption under California law. The Court's decision focused solely on the issue of the “administrative/production worker dichotomy” and whether employees who fall on the “production” side can qualify for the administrative exemption. [By way of background, the administrative/production worker dichotomy is a doctrine whereby the court looks at the employee's duties as compared to the business of the employer. If the employee's work centers on “producing” the product or service the company chiefly exists to provide, then the employee is a production worker. Thus, in the insurance context, if the company is solely in the business of adjusting claims, the claims handlers who provide that very service are production workers.] The lower court held that because the claims adjusters at issue serviced individual claims and did not provide advice on general policies or operations of the company, they were production workers and could not qualify for the administrative exemption as a matter of law.
Today, the California Supreme Court reversed, holding that the lower court erred in applying the administrative/production worker dichotomy so simplistically and using it to hold that claims adjusters were non-exempt as a matter of law. The Court did not go so far as to eliminate the administrative/production worker analysis, but made clear that this analysis was not dispositive of whether an employee qualifies for the administrative exemption. The Court emphasized that this was the error of the lower court. The lower court relied heavily on an earlier decision, Bell v. Farmer's Insurance Exchange, which had similarly applied the administrative/production worker dichotomy to find that claims adjusters were non-exempt production workers. The Supreme Court today held that the lower court's reliance on Bell was misplaced, given that the Bell case dealt with an older version of the applicable Wage Order—a version that provided very little guidance on the meaning of an administrative employee, justifying the court in that case in resorting to guidance outside the Wage Order (such as caselaw and opinion letters on the administrative/production worker dichotomy) to interpret the exemption. In contrast, in this case, the applicable Wage Order (4-2001) contains much more explanation of the administrative exemption and also specifically incorporated several federal regulations interpreting the exemption. As such, the starting point for analyzing the exemption should simply be the express language of the Wage Order and referenced regulations, and not the judicially created administrative/production worker dichotomy. Notably, the Court declined to decide whether the claims adjusters at issue actually qualified for the administrative exemption. However, the Court cited with approval several federal cases finding claims adjusters to be administratively exempt. The Court noted that an employee's role in “servicing” a company, such as a claims adjuster does, may well be exempt if sufficiently important and the employee's duties involve the regular use of discretion and independent judgment. The Court suggested that an employee does not have to advise the company on its overall policies or operations in order to meet the test for exemption. Nonetheless, the Court made clear that its ruling was limited to holding that the lower court erred in finding that the “production” worker analysis barred exempt status as a matter of law. The Court held that the trial court on remand would have to undertake a factually intensive analysis of the claims adjusters' actual duties (regardless of whether deemed “production” duties) and determine whether they meet the test for exemption as defined in the Wage Order and the regulations incorporated therein.
The Court's decision in Harris is a positive one in that it limits both the application and importance of the administrative/production worker dichotomy—a doctrine that has been used by many courts to find employees did not qualify for the administrative exemption. However, the Court's decision falls short in providing much specific guidance (and certainly not any bright lines) on how to define or apply the administrative exemption. It seems clear that determination of exempt status will continue to necessitate an individualized fact-intensive inquiry based on the circumstances involved in any particular case. The full text of the Harris case is available here.