California Supreme Court Weighs In (Or Some Might Say “Punts”) On The Administrative Exemption

Authored by Kimberly Brener.

On December 29, 2011, four years after granting review, the California Supreme Court decided Harris v. Superior Court, holding that the Court of Appeal mistakenly concluded that claims adjusters, as a matter of law, do not qualify for the administrative exemption. Employment lawyers had hoped that the Supreme Court would use this occasion to provide some definitive guidance for the employer community. Instead, the Court simply held that the Court of Appeal had improperly applied the “administrative/production worker dichotomy” as a dispositive test.

Liberty Mutual claims adjusters filed a class action alleging that Liberty Mutual misclassified them as exempt administrative employees. The trial court denied plaintiffs’ motion for summary adjudication on Liberty Mutual’s administrative exemption affirmative defense, but the Court of Appeal reversed the trial court and held that the administrative exemption did not apply to the claims adjusters as a matter of law. Specifically, the Court of Appeal strictly applied the “administrative/production worker dichotomy” test set forth in the Bell v. Farmers Insurance Exchange cases and held that adjusting claims was part of the “product” that their employer sold and therefore not an administrative duty.

While the administrative exemption analysis depends on multiple factors, the Harris decision was focused on only one, whether the employees’ work qualified as administrative. The California Supreme Court broke this analysis down into two components, one “qualitative” (i.e., whether the work is administrative in nature) and the other “quantitative” (i.e. whether it is of “substantial importance” to the employer’s management policies or general business operations).

In reversing the Court of Appeal, the California Supreme Court distinguished Bell. First, the Court noted that the Bellopinions limited their holding to the specific facts of that case. Second, the Court noted that the analysis employed by the court in Bell was dependent on its conclusion that the applicable Wage Order at that time (Wage Order 4-1998) did not provide a sufficient definition of the administrative exemption, thereby requiring the Bell court to look beyond the Wage Order’s language. In contrast, Wage Order 4-2001 (the current and operative Wage Order in Harris) incorporated specific federal regulations and contained “detailed guidance” concerning the administrative exemption. By relying on Bell’s application of the administrative/production dichotomy, the Court of Appeal in Harris erred by using the dichotomy rather than applying the language of the relevant wage order and regulations.

The Supreme Court ultimately declined to adopt a rule precluding the use of the dichotomy as an analytical tool. Instead, the Court held that, in determining whether work is administrative, courts must consider the particular facts before them and apply the language of the statutes and wage orders at issue. If the statutes and wage orders fail to provide adequate guidance, the Court held it would be appropriate to consider other sources, including, presumably, the administrative/production dichotomy.

Theonly concrete guidance from the California Supreme Court in Harris is that the administrative/production dichotomy is not a dispositive test for the administrative exemption. The Court left open the possibility that the dichotomy may still apply in future cases. Employers who were looking for more specific guidance from the Court on the administrative exemption will be disappointed, as, even after Harris, determining whether an employee satisfies the administrative exemption remains a highly fact-specific venture.