"First Impression --
Employment Law: 'Bell v. Farmers Insurance Exchange' is a must-read for resolving wage-hour exemption issues."
by Richard S. Rosenberg and Jeffrey P. Fuchsman

The California Court of Appeal recently issued a far reaching employment-law decision involving wage-hour law. In Bell v. Farmers Insurance Exchange, 2001 Daily Journal D.A.R. 2335 (March 5, 2001), a case of first impression, the court laid out the ground rules for when an employee is exempt from the state's overtime pay law. Analyzing the job requirements of the insurance carrier's in-house adjusters, the court ruled that these employees do not meet the prerequisites for the "administrative" exemption. If not appealed to the Supreme Court, the ruling clears the way for the adjusters to claim a share of what they say is millions of dollars of unpaid overtime. Notably, the state law under which the employees sued also makes the carrier responsible for the employees' attorneys' fees. These fees are estimated to exceed $1.2 Million thus far. The Bell case demonstrates how an erroneous overtime pay exemption has enormous financial consequences. Although no business is immune from such lawsuits, dot-com and hi-tech employers are particularly exposed because tech workers typically put in long hours without overtime compensation. Since BelI is a blueprint for those seeking to make this sort of claim, the case should be on every employer's mandatory reading list.

The Basics. To better understand the potential significance of Bell, it is helpful to review the basic rules regarding overtime. Every employee in the state is entitled to be paid overtime premium pay unless the employee's duties and pay meet one of the established overtime exemptions. Thus, all non-exempt employees must be paid one and one-half times their regular rate of pay for all hours worked in excess of eight in a workday, forty in a workweek, and the first eight hours on the seventh consecutive day of work in the workweek. Double time (twice the employee's regular rate) must be paid for all hours worked in excess of twelve in a workday, and for those hours beyond eight hours worked on the seventh consecutive day of work in the workweek.

The three main exemptions to these overtime requirements are the so-called executive, professional and administrative exemptions. These exemptions are set forth in Labor Code Û 515 and a series of regulations, commonly referred to as "Wage Orders", issued by the state's Industrial Welfare Commission ("IWC"). Each exemption has both a salary and a duties component which must be met. To satisfy the salary requirement, the employee must be paid a fixed salary which at no time is less than twice the state's minimum wage (currently $2,166.66 per month). The employee also must spend a majority of the workweek performing exempt duties. For "executive" employees, this means supervising at least two or more full time employees and performing duties typically associated with supervisory functions. The "professional" exemption is generally limited to the so-called "learned" professions who hold state licenses, e.g., lawyers, doctors, dentists, engineers, architects, teachers and CPA's. This exemption is also available to certain high level computer programers and analysts, and those in certain "artistic endeavors. The "administrative" exemption, which is the hardest to define, generally applies to employees that perform work directly related to the management policies or general business operations of the employer or the employer's customers.

Bell involved the application of the administrative exemption. The plaintiffs worked for Farmers Insurance Exchange ("FIE") as claims representatives who adjust insurance claims under automobile and homeowner's policies issued by various Farmers-affiliated companies. FIE treated the plaintiffs as exempt administrative employees, and did not pay them overtime. Plaintiffs filed a class action lawsuit for unpaid overtime. FIE asserted the administrative exemption as an affirmative defense to the plaintiffs' claims. The trial court granted the plaintiffs' motion for summary judgment on FIE's exemption defense, holding that as a matter of law the administrative exemption did not apply to the adjusters. FIE appealed. The court of appeal (1^st DCA) affirmed the summary judgment for the plaintiffs on the exemption issue.

The Production/Administrative Dichotomy. The appellate court first noted that overtime exemptions are to be narrowly construed. Ramirez v. Yosemite Water Co., 20 Cal. 4^th 785 (1999). Since this was a case of first impression, the court turned to analogous regulations in cases under the federal Fair Labor Standards Act ("FLSA") to define the scope of the administrative exemption. The court observed that under the FLSA, the first step in the analysis is to assess the role in the organization which the job at issue plays in the overall scheme of the employer's business. Relying heavily on the federal regulations, the court of appeal adopted the distinction drawn by the United States Department of Labor ("DOL") under the FLSA between true "administrative" employees (i.e., those whose primary duty is to administer the business affairs of their employer) and so-called "production" employees (i.e. those whose role is essentially to perform the service the employer is in business to provide). According to the court, the production worker role is incompatible with exempt status. The federal cases addressing the production/administrative dichotomy in a non-manufacturing setting draw a line between those employees whose primary duty is to administer the business affairs of their employer and those which perform the service the employer is in business to provide. E.g.,Dalheim v. KDFW-TV, 918 F.2d 1220 (5^th Cir. 1990). Thus, the federal courts have held that television news producers, inside sales employees, county probation workers, field investigators, escrow closers, and auto damage appraisers were non-exempt "production" workers because these employees performed services their employer was in business to provide, rather than duties relating to the management policies or general business operations of their employer or its customers.

The court concluded that since the insurance adjusters' primary role was to adjust insurance claims, they were non-exempt production workers. The evidence established that the business of FIE was to adjust claims for other Farmers-affiliated companies. The plaintiffs had no formal role in setting FIE claims policy or managing FIE's business structure. The plaintiffs' other duties, such as setting reserves, recommending coverage, estimating losses, providing risk advice, determining reservations of rights, and attending various litigation proceedings were found by the court to be associated with their claims adjusting function. The court found these duties placed the plaintiffs "squarely on the production side of the administrative/production worker dichotomy."

In affirming the summary judgment for the plaintiffs, the court recognized that the administrative/production worker distinction is not always applicable. For example, the federal regulations recognize that some companies, such as management consulting firms, may provide services that relate to business administration. The employees performing such consulting services may be exempt even though they are performing tasks their employer is in business to provide. Nonetheless, the court found that the plaintiffs were engaged in routine claims adjustment, whose "role in the company places the plaintiffs in the sphere of rank and file production workers." Having concluded that the plaintiffs' "role" was production and not administrative, the court found it unnecessary to even consider whether the insurance adjusters met the (primary) "duties" test. In doing so, the court held that there is a threshold requirement that the employee work in an "administrative role" for the exemption even to apply.

On a related issue, the court did reverse an interim award of attorney's fees to the plaintiffs of over $1.2 Million. The court held that while Labor Code Û 1194 does allow employees to recover attorney's fees in an overtime action, the statute does not authorize an award of interim fees. The plaintiffs must wait to the conclusion of the litigation to recover any fees which may be available.

Bell is important for several reasons. Bell is the first published case discussing the administrative exemption under California law. Bell discusses an important but often overlooked third requirement in the exemption analysis, namely the employee's role in the business. In addition to meeting the "duties" and "salary" tests, Bell holds that exempt administrative employees also must be employed in an administrative "role". Under the Bell analysis, most employees performing services that their employer is in business to provide would be non-exempt "production" workers even if the employee is highly compensated and also happens to exercise a high degree of independent judgment and discretion. The fact that Bell affirmed a summary judgment for the plaintiffs is particularly significant and will no doubt be heavily relied on by plaintiffs in future class action cases.

In the past eighteen months, there has been an onslaught of high stakes class action and multi-party overtime claims in California seeking millions in unpaid overtime premium pay. Bell underscores the need for companies to closely scrutinize who they classify as exempt for overtime pay purposes, as well as their overall compliance with wage and hour law. To minimize exposure to what could be a very expensive claim, employers should consider conducting self-audits now, with the assistance of counsel, to ensure that all employees are properly classified for payroll purposes.

Richard S. Rosenberg and Jeffrey P. Fuchsman are partners in the Universal City management labor law firm Ballard, Rosenberg, Golper & Savitt.