The California Court of Appeal found that workers’ compensation claims adjusters are exempt administrative employees in Hodge v. Aon Ins. Serv., a well-reasoned opinion certified for publication on February 24, 2011. In reaching this result, the court rejected the notion that Bell v. Farmers Ins. Exchange stands for the proposition that claims adjusters who work for insurance companies are ineligible for the exemption without regard to the importance of the work they perform, the judgment and discretion they exercise, or the fact that they perform such work on behalf of clients of their employer who are not in the claims adjusting business.

Kenneth Hodge, among others, brought a collective action on behalf of claims adjusters employed in California against Cambridge Integrated Services Group, Inc. to contest the fact that Cambridge classified them as exempt employees. While employed by Cambridge, the adjusters regularly interacted with clients and lawyers, doctors and other professionals, and they made independent conclusions about issues such as causation and appropriate compensation, using their professional judgment and discretion and their specialized training, experience and skills. They were involved in assessing complex litigated claims and responsible for millions of dollars of Cambridge’s clients’ money.

In analyzing whether these employees were exempt under California Wage Order 4, the court readily found that such workers – who, among other duties, set reserves of substantial importance to the business operations of their employer’s clients – qualify for exempt status as employees who exercise the judgment and discretion required by the administrative exemption. Even though the work of Cambridge’s adjusters arguably could be considered “production” work due to the fact that claims adjusting is the very work that the company exists to perform, the court looked beyond the so-called “production/administrative” dichotomy and noted that it is but one analytical tool available for use in making a determination regarding the administrative exemption.

In reaching its holding, the court looked first at adjusters who perform work for clients not in the insurance industry. By way of example, it noted that if Kmart, a retailer whose “production” workers sell consumer goods, has in-house claims adjusters who perform exempt administrative duties, they would clearly not be performing the production work of Kmart. The fact that Kmart may outsource such claims adjusting work to an insurance company, such as Cambridge, does not render the administrative exemption unavailable to workers employed by Cambridge who perform the exact same duties as Kmart’s in-house adjusters. Thus, the case stands for the important – and common sense – proposition that work for a client that would qualify under the administrative exemption for that client does not become nonexempt production work by virtue of the fact that the employer is in the business of providing that service to the client.

The court also concluded that the adjusters who performed work for insurance-related entities qualified for the administrative exemption. It focused on the actual work performed by the adjusters, notably the fact that they develop litigation strategies and set reserves that may total in the millions of dollars, with the average claim being $75,000 in one of the company’s offices. The court concluded that this work involved the exercise of judgment and discretion on matters of significant monetary import to the insurance company clients, and accordingly the administrative exemption was available. It distinguished Bell due to the low level of responsibility afforded to the claims adjusters who were the subject of that opinion.

This is an important case for employers both in the insurance industry and more broadly, as it has become common for plaintiffs, in reliance on Bell, to assert that they do not qualify for the administrative exemption if they perform work their employer was established to provide, without regard to the fact they may be paid very high salaries and make decisions that have a significant economic impact on their employers and/or their clients. The Hodge opinion will be extremely useful to employers in defending against such claims.