In consolidated class actions by approximately 1,600 claims adjusters against Liberty Mutual and Golden Eagle Insurance Companies, the Court of Appeal of California (Los Angeles) held in Harris v. Superior Court that the claims adjusters were not exempt from California’s overtime requirements because they did not perform work “at the level of policy or general operations,” but simply carried out the day-to-day operations of their employers. In so holding, the court followed the lead of the earlier decision in Bell v. Farmers Insurance Exchange, 87 Cal. App. 4th 805 (2001) (holding claims adjusters engaged in day-to-day operations were production employees and not exempt administrators). The decision could have broad implications for California employers.

The plaintiffs in the case were insurance claims adjusters, whose job duties included investigating and estimating claims, identifying potential fraud, making coverage determinations, setting reserves, negotiating settlements within their settlement authority, and making settlement recommendations for claims beyond that authority. The plaintiffs claimed they had been improperly classifi ed as “exempt” and were entitled to overtime pay. The companies argued that plaintiffs were exempt under the administrative exemption.

California’s administrative exemption, contained in Industrial Welfare Commission wage orders, is applied consistent with the pre-August 2004 Fair Labor Standards Act (“FLSA”) regulations. To qualify for the administrative exemption under those wage orders and regulations, an employee must be primarily engaged in – meaning for more than half his or her work time – offi ce or non-manual work “directly related to management policies or general business operations” of the employer or its customers. Federal interpretive regulations explain that this requirement “describes those types of activities relating to the administrative operations of a business as distinguished from ‘production’ . . . and limits the exemption to . . . work of substantial importance . . . .” As examples of such work, the regulations identify “advising the management, planning, negotiating, representing the company, purchasing, promoting sales, and business research and control.”

Although the employee’s work must be of substantial importance, the exemption “is not limited to persons who participate in the formulation of management policies or in the operation of the business as a whole. Employees whose work is ‘directly related’ to management policies or to general business operations include those whose work affects policy or whose responsibility it is to execute or carry it out.” After surveying these regulations, the court in Harris held that “only work performed at the level of policy or general operations can qualify as ‘directly related to management policies or general business operations.’” By way of example, the court noted that, if an underwriter consulted an adjuster about issuing a type of policy to a particular customer, the examiner’s advice would not be about management policies or general operations. It would be, however, if the adjuster advised about issuing such policies generally. Based on this reasoning, the court held that the claims adjusters were not exempt, as their duties involved particular customers and not business operations generally.

The effect of Harris on the exempt status of most California insurance claims adjusters seems clear. The decision, however, could have much broader implications. By restricting the administrative exemption to work at the policy-making level, the decision could undermine the exempt status of a substantial number of California employees whose job duties are limited to those that affect policy or execute or carry it out.