California Supreme Court to Hear Oral Arguments on case concerning the scope of the Administrative Exemption from California's Overtime Requirements

The California Supreme Court will hear oral arguments on Monday, October 3, 2011 in Harris v. Superior Court (Liberty Mutual Insurance). The California Supreme Court granted review of Harris almost four years ago on November 28, 2007, and identified the issue to be decided as follows:

Do claims adjusters employed by insurance companies fall within the administrative exemption (Cal. Code Regs. tit. 8, section 11040) to the requirement that employees are entitled to overtime compensation?

Although the case concerns claims adjusters, it is expected that the Court's decision may affect millions of California employees working in administrative positions, and provide clarification when and under what circumstances such employees are exempt from California's overtime and other requirements. It has not always been clear when and to whom the exemption applies, which has lead to considerable class action litigation over the last several years.

In this case, the Court of Appeal held that claims adjusters were not exempt. Central to the Court of Appeal's holding was the so-called "administrative/production dichotomy." Under the administrative/production dichotomy, employees do not qualify for the administrative exemption if they are primarily engaged in work that is considered production, or in a retail or service establishment, sales work, as opposed to work that is directly related to management policies or the general operation of the business, i.e., running of the business. The Court of Appeal found that the adjusters' work, investigating and estimating claims, making settlement recommendations, and identifying fraud, among others, was not carried out on the level of management policy or general operations, but rather was part of the day-to-day operations of Liberty Mutual's business. Therefore, the work did not qualify for the administrative exemption, according to the Court of Appeal.

While Atkinson, Andelson, Loya, Ruud & Romo is not involved in this case, Robert R. Roginson, a Partner with the firm's Employment Services Practice Group, and former Chief Counsel for the California Division of Labor Standards Enforcement, commented on the significance of the Harris case in today's Daily Journal. Roginson noted that the administrative exemption has historically been difficult to understand, making clarification of the issues in Harris important because of the exemption's application to a broad category of employees. It is hoped that the court will provide some clarity on the application of the administrative/production dichotomy, because, according to Roginson, it seems unrealistic to expect employers and enforcing agencies to comply with or enforce the law when the rules are unclear.

Please check back next week for further analysis of this case following the conclusion of oral arguments.

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