Court of Appeal: Administrative Exemption After Harris

Harris v. Superior Court (discussed here and article here) is the California Supreme Court's recent interpretation of the administrative exemption.  The Supreme Court reversed the lower court's decision, saying the court of appeal mis-applied the law.  Of note, the court insisted that the court of appeal apply the relevant standards in the wage order, which includes reliance on certain federal Department of Labor Regulations.  The court sent the case back down for the court of appeal's re-consideration.

The court of appeal has issued its new decision . Again, it decided that the claims adjusters at issue in the case are non-exempt under the administrative test.  In fact, the court again granted the plaintiffs' motion for summary adjudication, which means that the court believes the claims adjusters are non-exempt as a matter of law.  Therefore, there will be no trial over whether the class of claims adjusters are exempt or not. The only dispute is over damages and penalties. If allowed to stand or remain published, it appears the court of appeal's decision limits the administrative exemption.

The Supreme Court's decision rejected the court of appeal's analysis of the exemption because the court relied on the "administrative / production dichotomy" to the apparent exclusion of the Wage Order's tests for the exemption. This time the court of appeal mostly avoided the dichotomy and focused on a different method of analyzing the exemption:

Federal Regulations former part 541.205 (2000) is one of the regulations incorporated in Wage Order 4-2001, subdivision 1(A)(2)(f). That regulation defined the italicized phrase above. It is this directly related‘ phrase that distinguishes between 'administrative operations‘ and production‘ or sales‘ work. (Fed. Regs. § 541.205(a) (2000).) 

Parsing the language of the regulation reveals that work qualifies as 'administrative‘ when it is directly related‘ to management policies or general business operations. Work qualifies as directly related‘ if it satisfies two components. First, it must be qualitatively administrative. Second, quantitatively, it must be of substantial importance to the management or operations of the business. Both components must be satisfied before work can be considered directly related‘ to management policies or general business operations in order to meet the test of the exemption. (Fed. Regs. § 541.205(a) (2000).)  

The regulation goes on to further explicate both components. Federal Regulations former part 541.205(b) (2000) discusses the qualitative requirement that the work must be administrative in nature. It explains that administrative operations include work done by ‗white collar‘ employees engaged in servicing a business. Such servicing may include, as potentially relevant here, advising management, planning, negotiating, and representing the company. Federal Regulations former part 541.205(c) (2000) relates to the quantitative component that tests whether work is of ‗substantial importance‘ to management policy or general business operations. (Harris, supra, 53 Cal.4th at pp. 177–182 & fns. 3, 5, fns. 2, 4 & 6 omitted.)  

Only the qualitative component of the ―directly related‖ requirement is at issue in this case. (Harris, supra, 53 Cal.4th at p. 182.)

So, the Court set about analyzing what it means to be "directly related to management policies or general business operations."  In doing so, the court appeared to conflate the qualitative and quantitative standard.  The court reasoned that every job is in some way "directly related to management policies," which cannot mean that everyone is exempt.  The court explained that even the lowest level employees may "advise" management (about mundane things), and may "represent the company" when calling a cab.  The court reasoned that the exemption would include everyone if that were the case, seeming to ignore the "quantitative" test of "importance."

So, the court sought to draw a line and readily concluded:

The undisputed facts show that Adjusters are primarily engaged in work that fails to satisfy the qualitative component of the "directly related" requirement because their primary duties are the day-to-day tasks involved in adjusting individual claims. They investigate and estimate claims, make coverage determinations, set reserves, negotiate settlements, make settlement recommendations for claims beyond their settlement authority, identify potential fraud, and the like.

 * * *

The claims adjusters were responsible for determining coverage, setting and updating reserves, determining liability, evaluating a claim for settlement, and negotiating settlement of claims,‖ as well as recognizing potential subrogation on claims and forwarding such claims to the Subrogation Unit‖ and recognizing indicators of potential fraud on claims and forwarding such claims to the Special Investigations Unit.‖ The settlement authority of the adjusters under the declarant‘s supervision ranged from $6,000 to $40,000, and their expense authority ranged from $5,000 to $20,000. The declarant estimated that 85 percent of the adjusters‘ claims were settled within their settlement authority; for claims exceeding their authority, he ―generally expect[ed] them to provide [him] with a recommendation of settlement as well as a thorough analysis of their reasoning.‖ Other declarations described other adjusters who had lower or higher settlement authority (some as high as $100,000), but all of them performed similar duties.

None of that work, or the similar work of the other class members, is carried on at the level of management policy or general operations. Rather, it is all part of the day-to-day operation of Employers‘ business.

Here's how you know the court of appeal seems to have conflated the qualitative and quantitative components of the exemption:

For example, if a Golden Eagle underwriter consults with a Golden Eagle claims examiner regarding whether the company should issue certain types of policies to a particular customer, the claims examiner is not giving advice about management policies or general operations. But if Golden Eagle‘s underwriters consult with Golden Eagle‘s claims examiners regarding whether the company should offer certain types of policies in general (namely, whether such policies should be included in Golden Eagle‘s line of products), the claims examiners are giving advice about management policies or general operations.

So, that means if you are not formulating or implementing policies on a company wide basis, you're non-exempt?  The exemption does not say you have to formulate the policies. Whether you issue a certain policy to a particular customer is the application of a business policy. That is "administrative" work.  Similarly, if an employee relations manager evaluates the employee handbook policies and decides whether a management decision to discharge is wise, that is exempt work - advising management.  If you take the court of appeal's analysis to the next step, only the HR manager responsible for drafting the handbook is exempt; everyone else just applies it to the individual worker and is non-exempt?  Everyone in the accounting department is non-exempt except the CFO or those who manage 2 or more people? That will be news to thousands of employers, (and plaintiff lawyers.)

There's more here, but you get the picture.

Dear court of appeal, with respect, I think you got this one wrong. I hope the California Supreme Court decides to re-review this one or depublish it.

The case is Harris v. Superior Court and the opinion is here.