Source: http://www.hrresource.com/articles/view.php?article_id=4300
Timestamp: 2019-04-22 16:50:28+00:00

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Ten years ago, in Bell v. Farmers Insurance Exchange, 87 Cal. App. 4th 805 (2001), the California Court of Appeal held that insurance claims adjusters in that case were nonexempt administrative employees and, consequently, were entitled to overtime pay. That decision lead to a $90 million dollar judgment against the defendant and a slew of copycat lawsuits. Since then, a number of federal courts have gone in the opposite direction and held that claims adjusters are exempt from overtime. See e.g., Palacio v. Progressive Insurance Company, 244 F. Supp. 2d 1040 (C.D. Cal. 2002); McAllister v. Transamerica Occidental Life Insurance Company, 325 F.3d 997 (8th Cir. 2003); Cheatham v. Allstate Insurance Company, 465 F.3d 578 (5th Cir. 2006); In re Farmers Ins. Exch., Claims Representatives’ Overtime Pay Litig., 466 F.3d 853 (9th Cir. 2006); Roe-Midgett v. CC Services, Inc., 512 F.3d 865 (7th Cir. 2008); Robinson-Smith v. Gov’t Employees Ins. Co., 590 F.3d 886 (D.C. Cir. 2010). In Hodge v. Aon Insurance Services, the California Court of Appeal followed this trend and held that Aon’s claims adjusters were properly classified as exempt administrative employees. In doing so, the court in Hodge limited the holding issued 10 years ago in Bell.
The court in Bell reached its conclusion by applying the administrative/production dichotomy and did not address whether the adjusters met the duties standards set forth in the language of Industrial Welfare Commission Wage Order No. 4-2001. Under the administrative/production dichotomy, employees whose primary duty is producing the goods or services the employer produces are not considered exempt administrative employees. By necessity, application of the administrative/production dichotomy requires consideration of the nature of the employer’s business. The court in Hodge said this test was not useful and rejected the notion that “every enterprise can be subjected to a simplistic parsing of its ‘primary’ business function for purposes of labeling administrative versus production-level, rank-and-file workers.” Ultimately, however, the court said it would have reached the same conclusion even had it applied the administrative/production dichotomy.
The court in Hodge, unlike Bell, analyzed the exemption by applying the duties standards set forth in the Wage Order and distinguished the holding in Bell saying that outcome was unique to those facts. For example, the court emphasized, the claims manual in Bell specifically stated that questions of importance had to be decided by the branch claims manager or regional claims manager. The adjusters processed a large number of small claims and almost all of the claims were between $2,000 and $8,000. Also, in Bell, the adjusters’ authority to settle claims was set at $15,000 or lower—often $5,000 or lower. Significantly, on matters of importance, the claims representatives in Bell acted only as conduits of information that their supervisors used to make decisions.
By contrast, the adjusters in Hodge investigated claims, reviewed evidence, determined coverage questions, set reserves, authorized settlement or litigation and made independent conclusions about elements such as causation and appropriate compensation. These conclusions were based on facts gathered during investigations and were made by the insurance adjusters using their judgment, training and experience. The court said the setting of reserves—allocating an estimate of the total costs for a claim—is equivalent to the adjusters spending the clients’ money. The adjusters’ reserve authority was generally between $20,000 and $100,000, and the aggregate reserves set by an individual adjuster could tie up millions of dollars. The adjusters also negotiated and settled claims, managed litigation, made recommendations and worked with counsel in developing litigation plans.
While the decision in Hodge is a favorable one for employers, the California Supreme Court is expected to weigh in soon when it issues a decision in Harris v. Superior Court (Liberty Mutual Ins. Co.), 154 Cal. App. 4th 164 (2007). The California Supreme Court will decide the weight to be given to the administrative/production dichotomy under Wage Order No. 4-2001 as well as the proper analysis of the administrative exemption under the Wage Order.
Mr. Gregg advises and represents public and private sector employers in a broad range of labor and employment law matters arising under state and federal law. Mr. Gregg defends employers in state and federal courts and before various governmental agencies in cases that involve alleged discrimination, employment-related torts, wage and hour claims and employee benefits. Mr. Gregg also counsels and advises clients on employment practices and policies. Mr. Gregg handles all aspects of litigation including, trial, arbitration and administrative hearings.

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