In its recent decision in Harris v. Superior Court (Liberty Mutual) (B195121), California's Second District Court of Appeal muddied the waters that the state's Supreme Court had sought to clarify regarding the administrative exemption. It is widely anticipated that the case will make its way to the California Supreme Court again, but at least for now employers should be cautious and conservative in their use of the administrative exemption.

Only seven months ago, the California Supreme Court rejected the “administrative/production worker dichotomy” as a dispositive test for determining whether an employee can qualify for the administrative exemption from overtime laws. But on remand, the California Court of Appeal relied heavily on the production nature of the job in rejecting application of the administrative exemption. Additionally, the appellate court held fast to the notion that administrative duties must be performed at the level of policy or general operations to qualify for the exemption.

The Trial Court and First Court of Appeal Decisions

Pursuant to California’s current Wage Orders, employees are considered exempt from overtime law under the administrative exemption if their duties and responsibilities involve office or non-manual work “directly related to management policies or general business operations.” The Wage Orders incorporate former federal regulations, which state that the administrative operations of a business are distinguishable from production and which set forth a list of duties that can be considered administrative duties within the meaning of the exemption.

Claims adjusters from two insurance companies filed class actions claiming that they had been misclassified as exempt administrative employees and seeking damages based on unpaid overtime. After coordinating the cases, the trial court certified a portion of the class. However, the court denied, in large part, plaintiffs’ motion for summary adjudication, finding that defendants were not barred as a matter of law from arguing that the employees were exempt.

On review, the Court of Appeal focused on whether the nature of the employees’ work qualified under the administrative exemption. The court used the administrative/production worker dichotomy to conclude that the adjusters were “production” workers because their job duties involved investigating, adjusting, and settling claims. The court relied on the California Supreme Court’s decisions in Bell v. Farmers Insurance Exchange, which distinguished between administrative work, such as “administering the business affairs of the enterprise,” and production work, such as “producing the commodity . . . that the enterprise exists to produce and market.” The first Harris Court of Appeal decision “provided its own gloss” on the dichotomy by stating “only work performed at the level of policy or general operations can qualify as ‘directly related to management policies or general business operations.’ In contrast, work that merely carries out the particular day-to-day operations of the business is production, not administrative, work. That is the administrative/production worker dichotomy, properly understood.” On this basis, the Court of Appeal found that the adjusters were not exempt as a matter of law.

The California Supreme Court Decision

The California Supreme Court disagreed with the Court of Appeal’s analysis and rejected the administrative/production dichotomy as a dispositive test. The Court held that the dichotomy test was an outdated, judicially created tool that had been superseded by the federal regulations which were incorporated in the Wage Orders. Thus, the Court cautioned that the dichotomy should only be used when the language of the statutes, regulations, and wage orders fail to provide adequate guidance.

The Court also criticized the lower court for its failure to rely on the entirety of the relevant federal regulation in determining whether the administrative exemption applied. In analyzing whether the work was “directly related to management policies or general operations,” the lower court did not take into account the portion of the federal regulation that defines administrative work as “advising management, planning, negotiating, representing the company, purchasing, promoting sales, and business research and control.” In analyzing this language of the federal regulation, the Court indicated that duties can be considered administrative in nature even when they are not performed at the level of creating policy.

The Supreme Court reversed and remanded the case with instructions to the lower court to review the summary adjudication motion and apply the legal standards set forth in the Court’s opinion.

The Second Court of Appeal Decision

In late July, the Court of Appeal revisited the Harris case and analyzed the exemption issue under the pertinent federal regulations as directed by the Supreme Court. The court adhered to its original conclusion that “only duties performed at the level of policy or general operations” satisfy the requirement of work that is “directly related to management policies or general business operations.” Under this formulation of the “directly related to” requirement, the court held that the adjusters were engaging in duties that were part of the day-to-day operations and that such duties were not of a high enough level to merit application of the administrative exemption.

As instructed by the Supreme Court, the Court of Appeal also considered whether the adjuster’s duties involving advising, planning, negotiating, and representing the insurance agencies were sufficient to trigger the administrative exemption. In its analysis, the court read a dividing line into the federal regulation: planning, negotiating, and like duties that are performed at the level of policy or general operations of the company constitutes administrative activity within the meaning of the exemption, while those same duties, if related to the servicing of the company, do not satisfy the exemption requirements. In support of this conclusion, the court relied on a Third Circuit case in which negotiating prices and terms, representing the company, and purchasing products on behalf of the company were found by the court to be routine aspects of the salesperson’s job within the context of the business and therefore did not constitute administrative duties within the meaning of the federal regulation. Notably, the court disregarded many federal cases addressing whether claims adjusters do work that satisfies the exemption (many of which were cited by the Supreme Court as instructive) on the basis that it was not bound by the opinions and found them unpersuasive.

Though the court explicitly stated that it was not relying on the Bell cases, it concluded that the adjusters were producing the product of the insurance companies. But it also took the analysis one step further in holding that even if employees are not producing the employer’s product, they can still fail to satisfy the “directly related to” requirement if their work does not rise to the level of policy or general operations.

Conclusion

The recent Court of Appeal decision in Harris v. Superior Court demonstrates the complexity of the administrative exemption analysis and serves as a reminder that the law is still fluid. Given the Court of Appeal’s reliance on the premise that administrative duties must relate to management policies and general operations, as well as its continued reliance on the production nature of the job, California employers should proceed with caution when classifying their employees as exempt under the administrative exemption.

Because the opinion has been certified for publication, it is binding on trial courts. However, it is widely anticipated that the case will make its way to the California Supreme Court again. In the interim, we anticipate that employers will argue that the Court of Appeal decision is not consistent with the intent of the California Supreme Court opinion.