California Supreme Court Rules On Administrative Exemption for Overtime Pay

The California Supreme Court has further clarified the administrative exemption from overtime pay requirements. In Harris v. Superior Court, the Supreme Court found that the “administrative/ production worker” test is not a dispositive tool in determining whether an employee is exempt from overtime pay. Rather, courts must consider the particular facts and apply the language of the statutes and wage orders at issue. While the Court’s decision appears to provide more latitude for employers, the Court gives minimal guidance for determining what actually constitutes an administrative exemption.

California’s Mandatory Overtime Law and its Three Exemptions:
According to Section 510 of the California Labor Code, employers must pay overtime to any employee who works more than eight hours a day or forty hours a week. However, Wage Order No. 4-2001 establishes three exemptions to California’s mandatory overtime: The executive exemption, the administrative exemption and the professional exemption.

The administrative exemption covers employees who perform work directly related to management policies or general business operations of either the employer or the employer’s clients. Employees who fall under this exemption must customarily and regularly exercise discretion and independent judgment, and must work under only general supervision. Furthermore, they must either perform specialized or technical work requiring special training, experience or knowledge, or they must execute special assignments and tasks. There is also a minimum salary requirement of two times the State’s minimum wage for full-time employment.

Case Background:
Plaintiffs, who were claims adjustors, brought a class action lawsuit alleging that their employer erroneously classified them as administratively exempt from overtime pay. Plaintiffs moved for summary adjudication, arguing they were not exempt as a matter of law. The trial court granted Plaintiffs’ motion. The Court of Appeal affirmed the trial court’s decision by using the “administrative/production worker” dichotomy test.

The “administrative/production worker” dichotomy test distinguishes between “administrative employees,” who are primarily engaged in administering the business affairs of the enterprise, and “production-level employees,” whose primary duty is producing the commodity that the enterprise exists to produce and market. The former falls under the administrative exemption for overtime pay, while the latter does not.

Case Analysis:
The California Supreme Court’s decision focused on the scope of the administrative exemption for overtime pay under Wage Order 4-2001. The Court noted the “administrative/production worker” dichotomy test applied by the lower courts failed to utilize the actual language of Wage Order No. 4-2001 and other pertinent statutes and regulations. The Court further noted that the dichotomy may be impractical in the modern workplace: “Because the dichotomy suggests a distinction between the administration of a business on the one hand, and the production end on the other, courts often strain to fit the operations of modern-day post-industrial service-oriented businesses into the analytical framework formulated in the industrial climate of the late 1940s.”

Work qualifies as “administrative” when it is directly related to management policies or general business operations. The Court explained what work qualifies as directly related as follows: First, it must be qualitatively administrative in nature. Second, quantitatively, it must be of substantial importance to the management or operations of the business. To determine the qualitative component, the Court decided it needed to look to more specific statutes and regulations specifically listed within Wage Order No. 4-2001 to see what is actually administrative in nature. Former Regulation 541.205(b) (now (c)) provided that administrative operations include work done by white collar employees engaged in servicing a business. Such servicing may include advising management planning, negotiating, representing the company, purchasing, promoting sales, and business research and control. An employee performing such work is engaged in activities relating to the administrative operations of the business notwithstanding that he is employed as an administrative assistant to an executive in the production department of the business. These activities may be administrative in nature whether or not they are performed at the level of policy. (29 C.F.R. § 541.205(b)(c).) In this particular case, Plaintiffs attacked Defendants’ showing as to only the qualitative component. The Court thus expressed no opinion as to the quantitative component of the test.

The Supreme Court did not make a ruling on whether Plaintiffs were actually exempt, but instead sent the case back to the Court of Appeal to determine whether Plaintiffs’ duties were administrative in nature. The take-away point from this decision is that the “administrative/production worker” dichotomy is not dispositive on the issue of administrative exemption. Moreover, the Ninth Circuit has held that under more recent applicable federal regulations, claims adjusters are exempt from the Fair Labor Standards Act’s overtime requirements, “[i]f they perform activities such as interviewing witnesses, making recommendations regarding coverage and value of claims, determining fault and negotiating settlements.”

What This Means For You:
We now know that the “administrative/production work” dichotomy is no longer dispositive in determining exemption; work done by white collar employees engaged in servicing a business, including advising management, planning, negotiating, representing the company, purchasing, promoting sales, and business research and control may be deemed to satisfy the qualitative component. To satisfy the quantitative component of the same test, it must be of substantial importance to the management or operations of the business. Employers should consider these new guidelines in determining whether their employees properly qualify as administratively exempt. Each case must be determined on a fact-intensive basis; there are no bright line rules.