California Supreme Court Issues Long-Awaited Decision Regarding Administrative Exemption

In Harris v. Superior Court, a class of insurance claims adjusters sued their employer, Liberty Mutual Insurance Company (“Liberty Mutual”), for violating Wage Order 4-2001 by misclassifying them as exempt under the administrative category. Following the trial court’s grant of class certification, plaintiffs moved for summary adjudication on Liberty Mutual’s affirmative defense that plaintiffs were exempt from the overtime requirements under the administrative exemption. The trial court denied plaintiffs’ motion, and, at the trial court’s recommendation, the parties sought interlocutory review.

Summary of Court of Appeal Decision

On review, the Court of Appeal reversed and directed the trial court to enter an order granting plaintiffs’ motion for summary adjudication. The Court of Appeal held that plaintiffs could not be considered exempt employees because their work — investigating and estimating claims, making settlement recommendations, and identifying fraud, among others — was not administrative work. The Court of Appeal strictly applied the “administrative/production worker dichotomy” test set forth in the Bell v. Farmers Insurance Exchange cases, 87 Cal.App.4th 805 (2001) and 115 Cal.App.4th 715 (2004) (collectively “Bell”). In the Bell decisions, the court analyzed the now superseded 1998 IWS Wage Order as to whether workers were exempt or non-exempt depending upon whether they were “administrative” workers or “production” workers. According to the Bell court, 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 and not eligible for the administrative exemption.

In its rigid application of the administrative/production dichotomy, the Court of Appeal in Harris determined that claims adjusters could not qualify for the administrative exemption as a matter of law because the heart of their work — adjusting insurance claims — was part of the “product” that Liberty Mutual sold.

Summary of Supreme Court Decision

The California Supreme Court accepted review and reversed the judgment of the Court of Appeal with directions that it reconsider the trial court’s denial of the summary adjudication motion, applying the appropriate legal standard set out in the Supreme Court’s opinion. While the Court expressed no opinion on the strength of the parties’ positions on the merits of the exemption, it critiqued the Court of Appeal’s reliance on the administrative/production dichotomy.

The Court held that the administrative/production dichotomy is a useful but limited tool and it should not be relied upon in all cases. The Court distinguished Bell on two important grounds. First, the court limited the holdings in Bell to the specific facts involved in that case. For example, in Bell, the defendant had stipulated that the work performed by the plaintiffs was “routine and unimportant.” Second, the analysis used by the court in Bell was dependent upon its determination that the applicable Wage Order at that time, Wage Order 4-1998, did not provide a sufficient definition of the administrative exemption, thereby requiring the Bell court to look beyond the language of the Wage Order.

In contrast, the Court noted that the current and operative Wage Order in Harris, Wage Order 4-2001, incorporated specific federal regulations (former regulations 29 C.F.R. Sections 541.201-205, 541.207-208, 541.210, and 541.215) and contained very detailed guidance on the administrative exemption. Thus, by relying heavily on Bell and its application of the administrative/production dichotomy, the Court of Appeal erred by “provid[ing] its own gloss to the administrative/production worker dichotomy and us[ing] it, rather than applying the language of the relevant wage order and regulations.”

While the administrative/production dichotomy is not a dispositive test for the administrative exemption, the Court declined to articulate any rule that would prohibit use of the dichotomy as an analytical framework, in an appropriate case. Rather, the Court held that, in evaluating whether work qualifies as administrative, courts must consider the specific facts before them and apply the language of the statutes and Wage Orders at issue.

Unfortunately, the Court’s decision does not provide a bright-line rule on the use of the administrative exemption; indeed, the Court noted that determining whether an employee satisfies the administrative exemption is a highly fact-specific venture. However, the Court’s decision is likely to have a chilling effect on the use of the administrative/production dichotomy as a tool to disqualify employees from the exemption. Indeed, the Court noted that it is often a “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 1940’s.”

Practical Implications for Employers

Harris is significant in that it discounts the role of the administrative/production dichotomy, which previously served as an obstacle to classifying an employee as exempt from overtime. Harris underscores the importance of reviewing the particular circumstances and actual job duties of exempt administrative employees to determine if an exempt classification is appropriate. However, because the Court did not completely extinguish the dichotomy, employers are advised to consult with experienced employment counsel before classifying employees as exempt based upon the Harris decision. If you have any questions regarding the administrative exemption, or any other exemption, please contact your Payne & Fears attorney.