Almost four years after granting review, the California Supreme Court heard oral argument last week in Harris v. Superior Court, a case addressing the scope of the administrative exemption from California’s overtime pay requirements.  The Court’s decision, which will issue within the next 90 days, is expected to clarify a very significant issue for California employers -- whether or not the “administrative/production worker” dichotomy is determinative in assessing whether employees qualify for the administrative exemption.  If the Court finds that this dichotomy strictly governs the application of the exemption, employees who are involved in “production” work (e.g., either producing the product or providing the service that the employer sells) cannot qualify for the administrative exemption, no matter how significantly their job duties impact their employer’s business operations.

Background on Harris v. Superior Court:

California courts have taken different approaches to determining whether, and to what extent, the administrative/production worker dichotomy (a test used to determine the extent employees perform work related to the general operations of a business) governs the application of the administrative exemption.  In Harris, 64 Cal.Rptr.3d 547 (2007), the Court of Appeal strictly applied the so-called “administrative/production worker dichotomy” set forth in Bell v. Farmers Insurance Exchange, 87 Cal. App. 4th 805 (2001) (“Bell”) and held that insurance claims adjusters could not qualify for the administrative exemption as a matter of law because adjusting claims was part of the “product” that their employer (Liberty Mutual) sold.

In contrast, other California Courts of Appeal and the Ninth Circuit have rejected a strict application of the “administrative/production worker” test.  For example, in Hodge v. Aon Insurance Services, the California Court of Appeal declined to apply the dichotomy, finding it to be “unworkable,” and held that insurance claims adjusters qualified for the administrative exemption because they were engaged in work of a “substantial importance” to the general business operations of their employer’s customers.  

Oral Argument in Harris:

During oral argument, counsel for the plaintiff argued that the Court of Appeal correctly held that the claims adjusters were non-exempt “production” workers because adjusting claims is an essential part of the product that Liberty Mutual offers.  However, he conceded that in some circumstances a claims adjuster could be exempt.  In opposition, counsel for Liberty Mutual argued that the administrative/production worker dichotomy was simply a tool for courts to use and should not be strictly applied to Liberty Mutual’s claims adjusters, who performed quintessential administrative work that was of “substantial importance.”  

At the outset of oral argument, Justice Corrigan characterized Liberty Mutual’s appeal as a request “for a shot to prove” the exemption applies (e.g., by evaluating employees’ duties and the time spent performing such duties).  Later she noted that the administrative/production worker test has been criticized as being of limited utility in today’s work environment and noted the practical difficulties of applying the test to insurance claims adjusters.

However, questions from the bench about the California Court of Appeal decision in Bell (which strictly applied the administrative/production worker test) suggest that the Court is inclined to distinguish Bell, rather then reject it entirely.  For example, multiple justices asked whether the Court would need to disapprove of Bell to hold that the Court of Appeal in Harris got it wrong.  Justice Corrigan specifically highlighted, as a way to distinguish Bell, that it predated the Wage Orders which expressly incorporated the federal regulations.

Import of Harris and Predictions:

While Harris and several other cases addressing the administrative/production worker dichotomy involve insurance claims adjusters, the outcome of this case will be very significant for California employers in nearly all industries.  Many high-level employees who perform work of substantial importance to the management or operation of the employer’s business perform duties that are related to the products or services that their employer offers.  Based on the Court’s questions and comments at oral argument, we anticipate that the opinion in Harris will clarify that the administrative/production worker dichotomy does not categorically render these employees non-exempt (i.e. distinguish Bell and give Liberty Mutual its “shot” to prove the exemption applies).   Employers can expect a final answer from the Supreme Court by the end of the year.

Coming Soon:

Next up, on November 8, 2011, the Court will hear oral argument in Brinker v. Superior Court, the highly-anticipated case concerning an employer’s obligation to “provide” meal periods under California law (i.e., whether an employer must ensure that meal breaks are taken or make such breaks available and afford employees the opportunity to take them).