In a long-awaited decision, a unanimous California Supreme Court in Harris v. Superior Court (2011) 53 Cal. 4th 170, 135 Cal. Rptr. 3d 247, reversed a Court of Appeal decision. The plaintiffs, Liberty Mutual claims adjusters, filed a class action lawsuit seeking unpaid overtime wages based on their allegation that Liberty Mutual misclassified them as exempt administrative employees. The Court of Appeal had determined that the adjusters were entitled to overtime as a matter of law because they were not exempt employees under the “administrative exemption” to the general requirement that employees are entitled to overtime compensation. The Supreme Court in Harris did not resolve the issue of whether the exemption would apply to the Liberty Mutual adjusters, remanding the case back to Superior Court for further proceedings because of its view that the Court of Appeal applied an incorrect test to determine if the exemption applied. However, it cited with approval a 2007, 9th Circuit decision, which held, under the federal Fair Labor Standards Act, that adjusters who interview witnesses and make recommendations regarding coverage, the value of claims, determine fault and negotiate settlements would be exempt.

While the Harris decision was narrowly decided, and the Court did not provide any clear rule on how the “administrative exemption” is to be determined going forward (in many ways the decision is more notable for what it did not decide than what it actually did determine), the Court did provide guidance regarding how California courts should approach this issue in future cases. In summary, the Supreme Court rejected the more simplistic “administrative/production worker” dichotomy test that had been used in two leading Court of Appeals cases involving Farmers adjusters (the Bell cases) for the past ten years, in favor of a more complex and fact-specific analysis using the now-applicable Wage Order 4-2001 issued by the Industrial Welfare Commission (“IWC”), the incorporated federal regulations, and Labor Code section 515.

In the Bell cases, the Court of Appeal had determined that under the provisions of the then applicable Wage Order, which provided that “persons employed in administrative, executive, or professional capacities” were exempt from the overtime compensation requirements, that “claims adjusters were nonexempt ‘production workers,’” and thus entitled to be paid overtime. The scope of the administrative exemption was not specifically articulated at that time in the Wage Order or in the Labor Code, and the Bell cases articulated the “administrative/production worker” test that essentially distinguished between employees primarily engaged in “administering the business affairs of the enterprise,” [exempt] and production-level employees [non-exempt] whose “primary duty is producing the commodity of the enterprise” (whether goods or services).

After the Legislature amended various Labor Code sections the IWC adopted the now applicable Wage Order 4-2001 which has a more expansive definition of the administrative exemption. The Supreme Court in Harris decided only the question of whether the work of the adjusters was administrative, and summarized the statutory test to meet the administrative exemption as follows: “to qualify as ‘administrative,’ employees must (1) be paid at a certain level, (2) their work must be administrative, (3) their primary duties must involve that administrative work, and (4) they must discharge those primary duties by regularly exercising independent judgment and discretion.”

The term “primary duties” is defined in the applicable Wage Order as “more than half of the employee’s work time,” so at least half of the employee’s time must be spent doing work that fits the test of the exemption. The Court, using the Wage Order and the incorporated federal regulations, stated that a worker is employed in an administrative capacity if his/her duties and responsibilities are “directly related to management policies or general business operations” of the employer. The Court then said that the “directly related” component has two prongs: (1) qualitatively administrative and (2) quantitatively of substantial importance. The Court did not provide any further guidance to how this two-prong test of “directly related” is to be applied.

The “qualitative” nature of the work would appear to be met where employees’ work involves substantial discretion and independent judgment such as providing advice to management, engaging in planning, negotiating, or representing the company in some capacity. The “quantitative” nature of the work regarding its “substantial importance” to management policy or general business operations is vague, and suggests that there is an “importance” level that must be met before the work qualifies as administrative. The Court did not indicate what is required to meet the “quantitative” component.

What is clear then is that the Supreme Court rejected the “administrative/production worker” test of the Bell cases, due to changes in the law and more definitive guidelines in the Labor Code and Wage Order regarding the exemption. What is less clear is where the courts will go with the somewhat cumbersome guidelines the Court provided. The Court’s final words on this, no doubt not intended to be intentionally humorous, were that the “essence” of their holding is that “in resolving whether work qualifies as administrative, courts must consider the particular facts before them and apply the language of the statutes and wage orders at issue.” Many issues remain to be determined, and until the courts provide some bright line rules in this area it will often be a question of fact as to whether a particular type of work is exempt or not.