The California Supreme Court finally issued its decision in Harris v. Superior Court, rejecting a lower court’s interpretation of the “administrative exemption” from overtime. Unfortunately, the case provides limited guidance to employers on how to apply the exemption. Harris v. Superior Court, 2011 WL 6823963 (2011)

Generally, an employer must pay overtime pay in California unless an employee is “exempt” from the overtime law. “Exempt” employees do not get overtime pay. The exemptions include: the executive exemption, the professional exemption, the administrative exemption, the computer software professional exemption and the outside sales exemption.

The administrative exemption has long been a source of confusion for employers, who sought guidance on what exactly qualifies as “administrative work” for the administrative exemption.

With classification mistakes potentially erupting into class action lawsuits, employers were hoping for a clearly defined standard from the state high court — only to be disappointed.

Claims Adjusters Argued They Were Production Workers and Misclassified

The employees in this case, claims adjusters for Liberty Mutual, alleged they were misclassified as exempt administrative employees and sought damages for unpaid overtime. Their lawsuits were consolidated into one proceeding involving all non-management claims handlers and/or those performing claims handling activities.

The lower court focused on the “administrative/production worker dichotomy,” which distinguishes between two types of workers:

• Workers who engage in production level work that centers on producing the product or services that the company exists to provide; and
• Workers who engage in administering the business affairs of the company.

The lower court applied the administrative/production worker test to hold that the claims adjusters were not exempt. The insurance company is in the business of adjusting claims, and the claims adjusters provided that service without providing advice on general policies or operations of the company. According to the lower court, the claims adjusters were production workers and did not qualify for the administrative exemption.

The significant language from the lower court decision was that “only work performed at the level of policy or general operations” can qualify as administrative work. This language created a high standard and greatly limited the administrative exemption.

Supreme Court Focuses on Current Wage Order

The California Supreme Court rejected the lower court’s strict view of the administrative/production worker dichotomy and also rejected the idea that the administrative exemption could only apply to those workers involved in policy making.

According to the high court, the lower court erred in relying on decisions based on a previous version of the Wage Order, which was Wage Order 4-1998, instead of the current Wage Order, which is Wage Order 4-2001.

Under the current wage order, an administrative employee is exempt from overtime pay if the employee meets all of the following requirements:

1. Has duties and responsibilities involving one or both of the following:
   1. Office or nonmanual work directly related to management policies or general business operations of the employer or the employers; or
   2. The administrative functions of a school system or educational establishment or one of its departments or subdivisions engaging in work directly related to its academic instruction or training.
2. Customarily and regularly exercises discretion and independent judgment.
3. Does one of the following:
   1. Regularly and directly assists a proprietor or an employee employed in an executive or administrative capacity; or
   2. Under only general supervision, performs work along specialized or technical lines requiring special training, experience or knowledge; or
   3. Executes special assignments and tasks.
4. Is primarily engaged in duties that meet the administrative test. In general, the employee must spend more than 50 percent of his/her time performing exempt duties.
5. Meets the salary test.

What Qualifies as “Administrative” Work?

Under the 2001 Wage Order and incorporated regulations, work is “administrative” when it is “directly related” to management policies or general business operations. The court clarified that work is “directly related” if it satisfies two components:

1. It “must be qualitatively administrative.” This component can be met when “white collar” employees engage in servicing a business, including advising management, planning, negotiating and representing the company.
2. “Quantitatively, the work must be of substantial importance to the management or operations of the business.”

The court declined to issue a definitive decision on the exempt/nonexempt status of these workers, and sent the decision back to the lower court to apply the appropriate test to the facts. The court opined that claims adjusters may, in fact, meet the qualitative prong of servicing the business by negotiating settlements, advising management and processing claims. The claims adjusters’ work may well be exempt if they can also meet the quantitative component of the test and show that this work is of substantial importance to the management or operations of the business.

Job Duties, Not Job Titles, Are Key

Employers remain without the specific guidance they sought. Until the lower court issues its decision, employers should err on the side of caution when deciding whether to classify an employee as nonexempt under the administrative exemption.

Remember, the employee’s job title is not the key to exempt status. A business must examine the employee’s actual job duties to see if the nature of the employee’s actual work meets the exempt test. An all-too-common problem arises when employers give someone a job title that they think will make the employee exempt but, in reality, has little relation to the employee’s actual job duties.

Best Practices

Employers should:

• Prepare realistic job descriptions for all positions.
• Regularly audit job descriptions and exempt/nonexempt classifications to ensure that they meet all the criteria established under the law.
• Consider whether other internal documents, such as training manuals, performance evaluations, and policies and procedures, also support the exempt/nonexempt classification.
• Keep in mind that the administrative exemption is not an easy one to meet. Use HR Allen's HR On-Demand to use the Exempt/Nonexempt Wizard or one of the five Exempt Analysis Worksheets that best fits the situation you face.