The California Court of Appeal in Harris v. Superior Court (Liberty Mutual Ins. Co.) held that the administrative exemption does not apply to insurance claims adjusters and provided a detailed analysis of the requirement that the work performed be directly related to the employer's management policies or general business operations.  This ruling directly contradicts the prior California Supreme Court decision in this case and disregards federal precedent (including Ninth Circuit decisions holding that the administrative exemption does apply to claims adjusters). 

In Harris, plaintiff claims adjusters sought damages for unpaid overtime as part of a class action.  Defendant and employer Liberty Mutual Insurance Company asserted as an affirmative defense that the administrative exemption applied to the claims adjusters and therefore they were not entitled to overtime.  Liberty argued that the exemption applied because the adjusters advised management and planned, negotiated, and represented the company in processing insurance claims.  Further, it asserted that the adjusters were not mere "production workers" (i.e., employees who do not qualify for the exemption because they simply produce the employer's product rather than perform administrative work related to business operations) because they adjusted claims – Liberty's product is transference of risk, not claims adjusting.  Liberty claimed that because the adjusters did not perform production work, their work must be administrative, thus meeting the requirement for the administrative exemption.

Noting that exemptions should be narrowly construed, the court considered the language of California Wage Orders and federal regulations regarding the administrative exemption.  The applicable Wage Order states that the administrative exemption applies to an employee whose duties and responsibilities involve "[t]he performance of office or non-manual work directly related to management policies or general business operations of his/her employer or his/her employer's customers."  The court focused on the phrase "directly related," stating that it distinguishes between administrative and production or sales work; to be directly related, the work must be qualitatively and quantitatively administrative.  The court acknowledged that only the qualitative element was at issue in the case. 

The court explained that to meet the qualitative element, the work must relate to the "administrative operations" of a business.  It distinguished between duties regarding policy or general operations (e.g., engaging in running the business itself or deciding overall business course and policies), which meets the requirement, and merely carrying out day-to-day operations of the business, which does not.  The court determined that the adjusters were engaged in carrying out the day-to-day business operations (i.e., adjusting individual claims by investigating, negotiating settlements, etc.), which did not rise to the level of management policy or general operations of the business, as required by the exemption.  The court provided the example of an underwriter consulting with a claims adjuster regarding whether the company should issue certain types of policies to a particular customer versus consulting as to what types of policies the company should offer in general, the latter satisfying the qualitative element.  Further, it held that not all duties involving management, planning, negotiating, and representing an employer meet the qualitative element. This decision provides detailed insight into the requirements of the administrative exemption under California law and significantly narrows its application.  We will provide updates on any appellate developments.