In a decision narrowing the scope of the administrative exemption, a California Court of Appeal held in Harris v. Superior Court that insurance claims adjusters were improperly classified under the administrative exemption because they performed "production" rather than administrative work.

To qualify under California's administrative exemption, an employee must (among other requirements) be primarily engaged in office or non-manual work "directly related to management policies or general business operations" of the employer or its customers. The court found that the "directly related" language encompasses two requirements: (1) the work must be administrative as opposed to production work, and (2) the work must be of "substantial importance."

While acknowledging the line between exempt administrative and non-exempt production work is not clear, the court found that exempt administrative work must be carried out at the general operational or policy making level, and that producing the employer's product is not necessarily a condition for doing production work. Moreover, the Court emphasized that the test should not depend on the nature of the employer's business but rather on the level at which the employee operates.

As applied to the claims adjusters at issue in the case, the court held that they could not be exempt because none of plaintiffs' work was carried on at the level of management policy or general operations. Rather, plaintiffs were primarily engaged in work that falls on the production side of the dichotomy, namely, the day-to-day tasks involved in adjusting individual claims.

The court's decision in Harris represents a severe restriction on the use of the administrative exemption in California. Employers should carefully evaluate those employees classified as exempt administrators in light of the court's decision in Harris. In addition, employers should be mindful that the "administrative/production worker dichotomy" is merely one of the elements that must be satisfied under the administrative exemption.