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California Supreme Court Decides Case Involving Administrative Exemption

Published by on January 26, 2012

The California Supreme Court has issued a decision in Harris v. Superior Court (Liberty Mutual Insurance Company) regarding whether certain insurance company claims adjusters are administrative exempt employees under the California Labor Code and the Industrial Welfare Commission (“IWC”) Wage Orders.  More after the break. Plaintiffs were insurance claim adjusters that filed a lawsuit against […]

The California Supreme Court has issued a decision in Harris v. Superior Court (Liberty Mutual Insurance Company) regarding whether certain insurance company claims adjusters are administrative exempt employees under the California Labor Code and the Industrial Welfare Commission (“IWC”) Wage Orders.  More after the break.

Plaintiffs were insurance claim adjusters that filed a lawsuit against their employer for unpaid overtime alleging that that they were erroneously classified as administrative exempt employees. Plaintiffs moved for summary adjudication of defendants’ affirmative defense that plaintiffs were exempt from overtime compensation. The trial court denied plaintiffs’ summary adjudication motion. The parties sought interlocutory review by the Court of Appeal.

The Court of Appeal reversed the trial court’s denial of the summary adjudication motion and held that the adjusters did not qualify as administrative exempt employees as a matter of law. The Court of Appeal concluded that only employees who performed work for general operations or at the level of making company policy could qualify under the “directly related to management policies or general business operations” element of the administrative exemption test.

The Supreme Court reversed finding the Court of Appeal misapplied the substantive law. The Supreme Court remanded to the Court of Appeal with directions that it review the trial court’s denial of plaintiffs’ summary adjudication motion under the appropriate legal standard as set out by the Supreme Court’s decision. The Supreme Court rejected the view that the administrative exemption is limited to employees who operate at the level of policy making.  The Court stated that the administrative/production dichotomy is a useful but it should not be relied upon in all cases. The Court held the Department of Labor (“DOL”) regulations expressly incorporated into the IWC Wage Order, and no other DOL regulations, should be relied upon in interpreting the administrative exemption. The Court concluded that the Court of Appeal erred by not applying the incorporated regulations.

The Supreme Court stated that to qualify as administratively exempt, 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 Supreme Court went on to explain that qualifying as “administrative” has both a qualitative and quantitative element that must be satisfied.  The “qualitative” character is satisfied where employees service a business through such actions as “advising management, planning, negotiating, and representing the company.” The “quantitative” character is “whether work is of ‘substantial importance’ to management policy or general business operations.”  The Supreme Court provided no further explanation on what would qualify as “substantial importance.” Accordingly, the application of the administrative exemption still remains unclear under California law.

To read the entire text of the decision, click here.

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