Amy L. Lessa, Esq. FISHER & PHILLIPS LLP 4225 Executive Square, Suite 950 La Jolla, California 92037 phone: (858) 597-9600 fax:      (858) 597-9601 www.laborlawyers.com

NLRB RULINGS REGARDING SUPERVISORS PROVIDE CLARITY BUT MAY SPARK CONTROVERY

Recent Wage-Hour Court Ruling Pleases Employers

Employers are applauding a recent federal appeals court decision that overturned a $52.5 million overtime class-action verdict. The original decision by a federal trial judge was in favor of insurance claims representatives in seven Western states employed by Farmers Insurance Exhange. The representatives claimed that they were owed overtime pay.

In this landmark decision, the legal issue was whether the employer had "misclassified" the insurance adjusters as "salaried exempt" under the federal Fair Labor Standards Act ("FLSA"). A salaried exempt employee is not entitled to overtime pay and is not required to keep time records. (The state of California has a similar overtime exemption for administrative employees, although California's standards are generally harder to satisfy.)

In order to qualify for the FLSA exemption, the adjusters' "primary duty" required that they perform duties related to management policies or general business operations of the employer, and that they exercise "discretion and independent judgement" in matters of substantial importance to the business.

The insurance adjusters in this case were classified as three levels depending on experience and performance: claims adjuster, senior claims adjuster, and special claims adjuster. With the exception of the settlement authority, the duties of each class of adjuster were essentially the same. The level of settlement authority was fixed by upper management, with the less experienced adjusters having lower settlement authority. The average adjuster paid out approximately $1 million claims last year, with claims ranging from $2,000 to $8,000 in value. Given similar facts, a California appellate court in 2001, applying California law, had determined that these adjusters were non-exempt because their duties were "routine and unimportant," and more like "rank and file production workers." (Bell vs. Farmers Ins. Exch).

Apparently influenced by the Bell decision, the federal district court judge devised a $3,000 test. This test essentially made most adjusters non-exempt (eligible for overtime) if more than 50% of their claims paid out in a month were less than $3,000 in value. Based on this test, the district court awarded about $52.5 million to 1,039 former and current adjusters.

Rejecting this test, the U.S. Court of Appeals for the Nineth Circuit declared that there was no indication in the regulation that the type or value of claims handled made any difference in determining whether the adjusters were exempt. The Court determined that the adjusters were, in fact, required to perform all the duties that qualified for the exemption regardless of the type of claim handled; they used discretion to determine whether the loss was covered, they set reserves, they decided who was to blame for the loss, and they negotiated with the insured or his lawyer. In other words, based upon their duties as required by the regulation, they were thereby exemption from overtime pay.

Although the California courts are not bound by the Ninth Circuit's decision, employers may well argue that the decision has persuasive value for California courts because the same regulation clarifies California law as well. Indeed, similar sections of the federal regulation were expressly incorporated into California's Industrial Welfare Commission Wage Orders, which took effect on October 1, 2000. Therefore, it appears likely that, whether in federal or state court, this decision could have considerable impact on the current explosion of wage-hour class actions where employees seek unpaid overtime based upon their alleged misclassification as exempt.

This column is intended to provide general information and does not constitute legal advice. Fisher & Phillips LLP is a national law firm representing employers exclusively in labor and employment matters. Visit our website at www.laborlawyers.com.

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