Victory for Plaintiffs in Wage and Hour Class Action

The recent decision of the Second District Court of Appeal in Harris v. Superior Court (2012) 207 Cal.App.4th 1225 ends a long battle over the classification of thousands of claims adjusters employed by Liberty Mutual Insurance Company. Plenty of money was at stake. In Bell v. Farmers Insurance Exchange (2001) 87 Cal.App.4th 805, plaintiff insurance adjusters recovered in excess of $170 million in unpaid overtime. Accordingly, the parties in Harris had a great deal at stake, which fueled an epic battle. The specific issue at stake was whether insurance adjusters may be classified as exempt from the overtime laws under the so-called “administrative” exemption. This exemption has been the subject of a number of cases in recent years, largely because of what is known as the “administrative/production” dichotomy. In short, that legal theory attempts to distinguish between those employees who are engaged in producing the goods and services of the employer as opposed to those who are employed to run the business. Federal regulation 29 C.F.R. section 541.201 puts it this way:

“To meet the [administrative exemption] requirement, an employee must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example, from working on a manufacturing production line or selling a product in a retail or service establishment.” Id.

Employees engaged in an activity that constitutes the company’s primary purpose are production workers. Martin v. Cooper Elec. Supply Co. (3rd Cir. 1991) 940 F.2d 896, 903. However, there has been a recent trend, in cases where the plaintiffs are white collar workers, to limit or reject out of hand the administrative/production dichotomy. These new cases conclude that the purpose of this analysis is to distinguish between those who work on a factory floor and those who effectively run the business from an office. In today’s service-dominated economy, the theory goes, it is an artificial distinction to differentiate between those who run the business and those who provide the service or product of the business.

In Harris, as in Bell, plaintiffs argued that claims adjusters, by definition, perform duties and provide services which are the essential product of the insurance company. The employers argued that claims adjusters do not produce the employers’ product because employers’ product is the “transference of risk,” not claims adjusting. Round one went to the employers, with the Court of Appeal siding with Liberty Mutual in 2007. On petition to the Supreme Court, plaintiffs emerged victorious. In Harris v. Superior Court (2011) 53 Cal.4th 170, the court held that the Court of Appeal had misapplied the administrative/production dichotomy and remanded the case back to the Court of Appeal for further proceedings consistent with its direction. Grudgingly, the Court of Appeal applied the criteria specified by the Supreme Court and found in favor of plaintiffs.

This case is significant (as is the Supreme Court’s reversal) not only because it reaffirms the viability of wage and hour class actions, but also because it clearly establishes that the administrative/production dichotomy is alive and well in the field of white collar employment: a conclusion that a number of courts have in recent years urged is not the case. Although the plaintiffs here were claims adjusters, the reasoning applies to any office or “white collar” employment.