Is It Time To Deep-Six The “Administration-Production” Dichotomy?

There is a very funny set of books under the title “Unuseless Japanese Inventions” by Kenji Kawakami.  The books depict, in a matter-of-fact fashion, a series of pointless inventions of a type the Japanese call a “chingdogu” or “worthless tool”.  The closest American analogy is a Rube Goldberg contraption, one far more complicated and likely awkward than the problem it was intended to solve.  These include things like stickers depicting open eyes you can put on your eyelids while sleeping in class, or plastic protectors for your tongue so it won’t burn on soup, etc. One is a dusting device you attach to your cat so that it cleans your house as it chases mice (or in the case of my cats harasses you for tuna fish). Some might seem like a good idea of sorts until you realize that they have no practical application or simply defeat the very purpose of the task they are trying to simplify.

Years ago, the U.S. Department of Labor added what it surely thought was helpful language on the administrative exemption under the FLSA, noting that it was intended to cover employees who were helping run the business rather than “working on a manufacturing production line or selling product in a retail or service environment.”  29 C.F.R. § 541.201(a).  Simple enough – the exemption covers those assisting in the servicing of the business and not actually making its product or making sales. Unfortunately, this simple language, intended as one of many tools to assist in applying this complex exemption, has become the chingdogu of wage and hour jurisprudence.

Some courts in the past seized on this language and created what they called the “administration-production dichotomy” wielding it like a claymore to find that even positions the Department of Labor described as exempt to be mere “production workers” not falling within the DOL’s definition of exempt employment.  The most frequent example of this involves the insurance industry.  Despite extremely clear DOL guidance that insurance claims adjusters are exempt (29 C.F.R. § 541.203(a)), “production dichotomy” arguments are a virtual staple of plaintiff claims.

Fortunately, most recent cases have limited the application of this notion and are now routinely finding that insurance claims adjusters and investigators are not production workers, as demonstrated by a recent Sixth Circuit opinion.  In Foster v. Nationwide Mutual Insurance Co., Case No. 12-3107 (6th Cir. Mar. 21, 2013), the plaintiffs were 91 Special Investigation Unit investigators who challenged their exempt status based on, among other things, the administration-production dichotomy.  As their title implies, it was their job to investigate potentially fraudulent insurance claims.

Now, everyone knows that insurance companies sell insurance policies.  The plaintiffs, however, argued that the real “business” of insurance is “asset protection” and thus argued that any employee working to protect assets must be a non-exempt production worker.   Fortunately, the trial court rejected this argument on summary judgment.  It did, however, find a genuine issue of material fact as to whether the plaintiffs exercised discretion and independent judgment.  The plaintiffs waived their jury demand and, following a seven-day bench trial, the district court found in the defendant’s favor.

The plaintiffs appealed on essentially two grounds.  The first, as one would expect, was to argue the administration-production dichotomy.  The Sixth Circuit, citing the wealth of contrary authority rejected it.  Second, the plaintiffs argued that despite the district court’s findings, the plaintiffs did not exercise discretion and independent judgment.  The plaintiffs were savvy enough not to argue that the findings were clearly erroneous, a difficult standard at best, but rather that the court’s findings related to tasks there did not constitute discretion as a matter of law.  This argument devolved into a corollary to the administration-production dichotomy – their contention that investigatory work did not require discretion.  The Sixth Circuit rejected this argument as well.

The Foster decision demonstrates two important things.  First, plaintiffs are continuing to make production-dichotomy arguments despite the multiple pronouncements of several courts and will likely do so until that chingdogu tool is scrapped entirely.  Second, the case demonstrates one of the perils for plaintiffs in these cases, which is that employers prevail on a significant number that are tried.

The bottom line:  Another Circuit Court has rejected the administration-production dichotomy in the insurance context.