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Exemptions from Wage and Hour Requirements: Administrative Employees

The federal and state exemptions for administrative employees are phrased similarly, but may differ in their application to particular jobs. The federal standard appears in 29 CFR section 541.200, which provides that an administrative employee is one (1) who is paid a salary of at least $455 per week, (2) whose primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers, and (3) whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. Management and general business operations are defined in section 541.201, and discretion and independent judgment in section 541.202.

Under the definition in the California wage orders, an administrative employee is one (1) whose duties and responsibilities involve either (a) performance of office or non-manual work directly related to management policies or general business operations of his/her employer or his/her employer’s customer, or (b) the performance of functions in the administration of a school system, or educational establishment or institution, or of a department or subdivision thereof, in work directly related to the academic instruction or training carried on therein, and (2) who customarily and regularly exercises discretion and independent judgment, and (3) who regularly and directly assists a proprietor, or an employee employed in a bona fide executive or administrative capacity, or who performs under only general supervision work along specialized or technical lines requiring special training, experience, or knowledge, or who executes under only general supervision special assignments and tasks, and (4) who is primarily engaged in duties that meet the test of the exemption, and (5) who earns a monthly salary equivalent to no less than two times the minimum wage, which equates to $640 per week. The wage orders point to the federal regulations for guidance on the definition.

Section 541.203 of the federal regulations contains examples of some jobs that do and do not meet the test for the exemption. In addition to the examples given there, the Administrator of the Department of Labor’s Wage and Hour Division Administrator has opined in FLSA 2010-1 that the exemption generally does not apply to mortgage loan officers.

Illustrative of the difficulties of applying the federal and the state exemptions are cases involving insurance claims adjusters. Section 541.203 states that they generally meet the duty requirement of the exemption “if their duties include activities such as interviewing insureds, witnesses and physicians; inspecting property damage; reviewing factual information to prepare damage estimates; evaluating and making recommendations regarding coverage of claims; determining liability and total value of a claim; negotiating settlements; and making recommendations regarding litigation.”

In a case decided under an earlier version of the wage orders the California Court of Appeal refused to apply the exemption to claims adjusters, ruling that they were involved in production, rather than administrative work. See Bell v. Farmers Ins. Exchange, 115 Cal.App.4th 715 (2004);  But, last year, in Harris v. Superior Court, 53 Cal. 4th 170 (2011), the California Supreme Court directed California courts to refrain from using the production/administrative dichotomy as the sole determinative factor in applying the exemption, pointing to a more elaborate explanation of the exemption in the current version of the wage orders. The Supreme Court did not determine whether the employees in the case before it were exempt, just that the Court of Appeal had applied the wrong analysis.

UPDATE [7/23/2012]

On remand, the Court of Appeal in the Harris case applied the Supreme Court’s analysis, and again determined that the claims adjusters did not fall within the administrative exemption. “The undisputed facts show that Adjusters are primarily engaged in work that fails to satisfy the qualitative component of the ―directly related‖ requirement because their primary duties are the day-to-day tasks involved in adjusting individual claims. They investigate and estimate claims, make coverage determinations, set reserves, negotiate settlements, make settlement recommendations for claims beyond their settlement authority, identify potential fraud, and the like.” See  Harris v. Superior Court, Case No. B195121 (Cal. Ct. App. 7/23/2012).