Compliance Bulletin

Supreme Court To Decide Key Overtime Case
February 1, 2010

Pending before the California Supreme Court is a case that could rewrite the “administrative” exemption to the state’s wage and hour rules under Wage Order 4-2001. This wage order governs the wages and hours of employees in “Professional, Technical, Clerical, Mechanical, and Similar Occupations,” and bank employees are largely covered by it.

In California, the general rule is a person who works more than 40 hours in a week must be paid overtime unless the worker is specifically exempt. The three primary exemptions are for “executive” personnel, “administrative” personnel, and “professionals.” An employee’s exempt status is determined on the basis of his or her actual duties (as opposed to job titles or descriptions), and the employee must be paid a monthly salary equivalent to no less than twice the state minimum wage. Both the requirements of an exemption and the salary test must be met.

Among the three categories, the administrative exemption is the least well-defined. Executives are typically the presidents, managers, and department heads or an organization, while professionals are certain licensed individuals such as lawyers and physicians. Exempt administrative personnel, on the other hand, are those whose duties involve work “directly related to management policies or [the employer’s] general business operations.” (Wage Order 2001-4). Such employees exercise discretion and independent judgment and, in pertinent part, either assists an executive or performs work along specialized or technical lines requiring special training, experience, or knowledge. Wage Order 4-2001 states that it is to be construed in a manner consistent with regulations issued under the federal Fair Labor Standards Act.

One of these regulations, 29 CFR Section 541.205(a), states that work that is “directly related to management policies or general business operations” is distinguished from “production” or, in a retail or service establishment, “sales” work. The phrase is intended to limit the exemption to persons who perform work of “substantial importance to the management or operation of the business” of the employer or the employer’s customers. It is the application of this language and other sections of the FLSA regulations that is the subject of Harris v. Superior Court (Liberty Mutual Insurance Company) now before the Supreme Court.

In the Harris case, a class of claims adjusters sued their employer, Liberty Mutual Insurance Company, for violating Wage Order 4-2001 by misclassifying them as exempt under the administrative category. The California appellate court accepted appeals by both sides to decide questions related to class certification. The appellate court relied heavily on the federal regulatory distinction between bona fide administrative work, which is exempt, and production or sales work, which is not. The business of an insurance company is to sell policies and manage claims. Adjusting claims, according to the court, is akin to production in that the work is performed to carry out the day-to-day affairs of the business. Accordingly, the court ruled in the plaintiffs’ favor and defendant appealed to the Supreme Court.

Interpreting the meaning of the administrative exemption, the Harris decision states, ”We take it to mean that only work performed at the level of policy or general operations can qualify as ‘directly related to management policies or general business operations.’ In contrast, work that merely carries out the particular, day-to-day operations of the business is production, not administrative, work.” Further on, the court cites approvingly language from another case: “An employee doing exempt administrative work is engaged in ‘running the business itself or determining its overall course or policies,’ not just in the day-to-day carrying out of the business’ affairs.”

CBA filed amicus curiae briefs with the appellate court and the California Supreme Court on behalf of the banking industry. CBA offered no opinion whether insurance adjusters should or should not be exempt. Our concern is with the articulated standard of the decision which, contrary to the prevailing view, strongly suggests that only a very few employees at the highest level of an organization could be exempt under this category.

The administrative/production dichotomy may have greater relevance in a factory than in today’s service-oriented economy. If elevated to a litmus test for the administrative exemption rather than one of many analytic tools, as the Harris court has done, the consequences for employers in this state could be dire. Under the ruling, a bank could be characterized as an employer that is in the business of making loans. Its day-to-day operations involve marketing, reviewing loan applications, underwriting, disbursing proceeds, and collecting payments. Most banks would contend, with good reason, that certain personnel performing these functions are properly classified as exempt administrative employees, even if they do not manage a department. Commercial loan officers, for example, are highly independent, exercise broad discretion, and perform work along specialized and technical lines requiring special training, experience, and knowledge. They handle transactions that are worth from hundreds of thousands of dollars to millions of dollars, and they are highly compensated. Yet, pursuant to the ruling, these employees would be classified as “production” personnel performing day-to-day sales work and thus are non-exempt.

A similar analysis could apply to a host of other bank personnel who are also highly skilled and independent but whose work relate to individual transactions or other day-to-day operations. Put another way, if affirmed, this decision casts doubt on the classification of any current employee under the administrative category who is not a high level officer having company-wide responsibilities.

Violation of wage and hour rules could expose a company to administrative audits and enforcement by the state Wage and Hour Division or the Division of Labor Standards Enforcement. Also, back overtime pay claims can be sought by an employee either individually or through collective action. The Supreme Court accepted the case for review more than two years ago and has not acted on it. CBA will alert its membership of any developments.

The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.

© This CBA Regulatory Compliance Bulletin is copyrighted by the California Bankers Association, and may not be reproduced or distributed without the prior written consent of CBA.

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