Many insurers have a longstanding practice of paying claims adjusters a set weekly salary, regardless of the number of hours they actually work.  The practice has support in federal labor regulations; the regulations expressly exempt claims adjusters from the overtime requirements of the Fair Labor Standards Act (FLSA), if their duties include discretionary and administrative activities such as interviewing witnesses, inspecting property damage, reviewing information for damage estimates and making recommendations regarding coverage.  But an insurer can lose the benefit of those regulations by being careless in how it documents its employment policies.  This month, in MacGregor v. Farmers Insurance Exchange, No. 2:10-cv-03088 (D.S.C. Aug. 20, 2014), a federal court held that a putative class of claims handlers raised a triable issue of fact as to whether the regulation applied to them, because the insurer called its adjusters “non-exempt” in three unrelated documents that had been produced over a nine-year span.  The case illustrates the importance to employers of putting their records in order before a classification claim arises.

Classification Under the FLSA

The FLSA, as well as the employment laws of many states, creates private causes of action to redress claims for unpaid wages, including unpaid overtime.  (The federal statute also provides administrative complaint procedures.)  Damages available to employees include not only the return of unpaid wages, but also, in cases of “willful” violation, attorneys’ fees and statutory damages of up to twice the amount of the unpaid wages.  The FLSA specifically provides for “collective actions,” in which employees can “opt-in” once a class has been certified, and class actions are also permitted under the laws of many states.

In recent years, plaintiffs’ firms have inundated courts with these collective and class action lawsuits, including suits against financial institutions.  Most have alleged that the employer misclassified employees as “exempt” from federal or state overtime requirements.  The suits charge that the employees who were paid on a salary basis actually should have been paid on an hourly basis—and should have been compensated at time-and-a-half for time in excess of 40 hours in any work week.

The Administrative Employee Exemption

The overtime requirements underlying these suits are subject to an “administrative employee exemption.”  The administrative employee exemption is one of the three primary “white collar” exemptions under the FLSA, along with the executive (which applies to certain supervisors) and professional exemptions.  The administrative exemption applies to employees who perform work directly related to management policies or general business operations, and who customarily and regularly exercise discretion and independent judgment in their job.  Such an employee must also be compensated on a salary or fee basis at a rate of not less than $455 per week .

One FLSA regulation (29 C.F.R. § 541.203(a)) specifically addresses insurance claims adjusters:

Insurance claims adjusters generally meet the duties requirements for the administrative exemption … if their duties include activities such as interviewing insureds, witnesses and physicians; inspecting property damage; reviewing factual information to prepare damage estimates; evaluating and making recommendations regarding coverage of claims; determining liability and total value of a claim; negotiating settlements; and making recommendations regarding litigation.

Whether the exemption applies in any given case is fact-driven.  The FLSA must be construed liberally in favor of employees, and exemptions are narrowly construed against the employer.  Nevertheless, the statute and regulations give insurers a strong starting point for disputes over the exempt status of claims handlers.  Earlier this year, for example, in Estrada v. Maguire Insurance Agency, 2014 WL 795996 (E.D. Pa. Feb. 28, 2014), a federal district court found that an auto claim examiner was exempt under the administrative exemption, even though he was “generally assigned relatively simple, low-cost … claims,” because the adjuster

acted as [the insurer’s] representative in speaking with claimants and insureds, obtaining damages estimates, and making liability determinations. This work directly related to the management or general business operations of the employer, as claims examiners carry out one of the most essential tasks of an insurance company—processing claims.

What Could Go Wrong?

MacGregor involved a group of property claims adjusters for Foremost Insurance Company, a Farmers subsidiary.  Their responsibilities included handling property claims, inspecting newly-insured properties to ensure that they conformed to customers’ and agents’ descriptions and handling appraisals for desk adjusters.  When Farmers moved for summary judgment, on the ground that the administrative employee exemption applied to the plaintiffs’ claim, the court duly noted that they “exercised discretion by conducting many of the activities described in 29 C.F.R. § 541.203.”

The court went on to note, however, that the plaintiffs had put in evidence three documents prepared by Farmers in which it referred to its adjusters as “non-exempt”:  an undated “job profile”; a 2008 memorandum from a vice president of human resources to “All Non-Exempt Claims Representatives”; and a 2005 human resources document, stating that “[l]itigation has resulted in a court decision that requires Property Personal Lines Claims Representatives to be classified as non-exempt employees. This change of status impacts Property Adjusters ….”  (The plaintiffs also offered evidence that they were required to obtain approval before working overtime hours, but the court did not cite that evidence in connection with the administrative exemption.)

The employer bears the burden of establishing that the administrative employee exemption applies in any given case by clear and convincing evidence. In MacGregor, the court held that the three documents referring to adjusters as “non-exempt” made it impossible to rule at a preliminary stage that Farmers had satisfied that burden, and it denied the insurer’s motion for summary judgment.

The Takeaway

It is possible that the plaintiffs in MacGregor could prove they qualified as non-exempt employees, even without the three documents cited by the court.  But it is virtually certain that those documents increased the costs that Farmers will ultimately incur in connection with this dispute.  Insurers that have not yet done so should consider auditing their current and past practices, to confirm that claims adjusters have been properly classified.  The results of the audit could help negate the impact of individual statements in company records, like the ones that surfaced in MacGregor.  On the other hand, if the audit determines that adjusters should have been treated as non-exempt, the company will have the opportunity to resolve the issue without litigation.  And even if litigation is unavoidable, the company will have reduced its exposure to statutory damages for a “willful” violation under the FLSA.