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Court Of Appeals Case Expands Upon Test : New California Court Of Appeals Case Expands Upon Test For Determining Whether "Administrative" Employees Are Exempt From State Overtime Laws

Bell v. Farmers Insurance Exchange, Case No. A091134 (March 5, 2001) restricts the availability of exempt "administrative" status under federal and state wage and hour law. Every California employer should know and understand the implications of Bell for its business.

Both the California Labor Code and the Fair Labor Standards Act ("FLSA") provide an exemption from the payment of overtime for employees employed in an "administrative capacity." Bell accepted plaintiffs' argument that under federal law, the regulations that implement the FLSA draw a distinction between "administrative" and "production" work. "Administrative" work encompasses tasks related to the "servicing" of a business, such as
planning, negotiating, purchasing, marketing and business research. "Production" work,
plantiffs contend, encompasses tasks related to the manufacture of the employer's goods or the performance of the employer's core services. For many years, federal courts placed limited emphasis upon this administrative/production dichotomy, focusing instead upon other elements of the test, such as whether the employee performed work of "substantial
importance" to the enterprise. Plantiffs contend that starting in 1990, however, a number of federal circuit courts have expanded upon this dichotomy by first identifying the "production" work of the employer (whether goods or services) and then denying exemption administrative status to employees primarily engaged in such activity.

Until Bell, no California state appellate court had comprehensively addressed the administration/production dichotomy or whether it applies to California's wage and hour law. In Bell, the First Appellate District held that it does. The court, stating it was following the federal cases, held that claims adjusters for Farmers Insurance Exchange ("FIE") "produced" the company's primary product - defined by the court as "the handling of insurance claims" - and were not exempt administrative employees.

Facts of Bell

FIE is one of many affiliated entities within the Farmers Insurance Group of Companies. According to the court, the sole and exclusive business of FIE is handling insurance claims. The other affiliated entities handle sales and "activities that would normally be included within the executive and administrative functions of a corporation." Plaintiffs were a class of current and former claims adjusters who worked within FIE's network of
branch offices. The adjusters were responsible for settling claims for FIE, determining liability, recommending coverage, estimating damage, detecting fraud and various other duties associated with claims adjusting.

Plaintiffs filed a motion for summary adjudication, arguing that FIE's primary product is "claims handling" and that claims adjusters are therefore non-exempt employees engaged in "producing" the adjustment of claims. The trial court, applying the administrative/productive dichotomy, granted plaintiff's motion.

The Court's Legal Analysis

The Significance of Federal Authorities When Interpreting The Administrative Exemption Under State Law

After extended analysis, the court concluded that federal authorities may serve as an aid to determining whether an employee is an exempt administrative employee under state law. Looking to those federal authorities, the court identified three distinct sets of criteria for
determining exempt "administrative" status: (1) the role of the employee within the organization; (2) the job duties of the employee; and (3) the employee's level of remuneration. Within the first criterion - the employee's role within the organization - the court held that federal cases had focused upon the administrative/production dichotomy. The court commented, however, that the state wage order applicable to insurance companies - Industrial Welfare Commission ("IWC") Wage Order No. 4 - covered the duties and level of remuneration required for administrative exempt status, but not the
employee's "role." Accordingly, the court deemed it useful to look to federal law to make this assessment.

The Administrative/Production Dichotomy

The federal regulations provide that exempt administrative status applies only to employees who perform work "directly related to management policies or general business operations." The federal interpretive regulations explain that this requirement is met only by employees performing administrative work, not by those employees performing primarily production work. 29 C.F.R.

Bell accepted the argument that the federal courts have expanded this distinction. Specifically, says Bell, recent cases have focused on the "nature of the employer's business," distinguishing between employees who administer the business affairs of the enterprise, and those whose primary duty is producing the commodity (goods or services) that the enterprise exists to provide. As an illustration of this distinction, Bell cites, among
other cases, Reich v. American Int'l Adjust. Co. Inc., 902 F. Supp. 321, 325 (D. Conn. 1994). In Reich, the court found that the defendant was engaged in the business of "resolving damages claims." The court then held that automobile damage appraisers working for an insurance company merely exercised the day-to-day activity of resolving claims - "producing" the service that defendant provides - rather than "administering" the

The Appellate Court Upheld The Grant Of Summary Judgment to Plaintiffs

The Bell court proceeded to adopt the administration/production dichotomy for assessing the "role" of an employee under California's administrative exemption. The court first defined the "nature" of FIE's business as "the handling of claims," stating that the sole function of FIE's branch offices is "claims adjusting." Indeed the court stated that it would not consider the functions performed elsewhere in the FIE organization as it was only
concerned with the business function of the branch claims offices in California.

Having defined the nature of the business in this manner, the court concluded that the claims representatives are engaged in settling claims, the day-to-day activities associated with the "production" of claims adjusting. The court rejected FIE's argument that the plaintiffs' other duties, including determining liability and recommending coverage, were
administrative in nature. The court found that such duties were directly associated with the claims adjusting function. Moreover, the court found it significant that FIE has set the representatives' authority to settle claims at a low level, and that on matters of "relatively greater importance," claims representatives were required to turn to supervisors.
Accordingly, the court concluded that the claims adjusters did not fall within the
"administrative exemption" and are entitled to overtime.

Although noting that courts must exercise caution in granting summary judgment on the administrative/production dichotomy, the court upheld the trial court and affirmed summary adjudication (on liability) for the plaintiffs.


Although Bell specifically addressed the exempt status of claims adjusters, the court's adoption of the administrative/productive dichotomy is significant to all employers who apply the administrative exemption to any category of employees. Accordingly, it is important that employers carefully review and assess the implications of this case within their organizations. In addition, we recommend that employers carefully review the other
elements of exempt administrative status within the wage orders applicable to their
industries or occupations to make sure that they fully comply with all of the requirements of the test.  


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