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Frances Harris et al v. the Superior Court of Los Angeles County

December 29, 2011


Ct.App. 2/1 B195121 Los Angeles County Super. Ct. No. BC 246139 JCCP No. 4234 Ct.App. 2/1 B195370 Los Angeles County Super. Ct. No. BC 246140 JCCP No. 4234 Judge: Carolyn B. Kuhl

The opinion of the court was delivered by: Corrigan, J.

This litigation tests whether certain insurance company claims adjusters are exempt employees, not entitled to overtime compensation under the Labor Code and regulations of the California Industrial Welfare Commission (IWC or Commission). Reviewing the trial court's denial of a summary adjudication motion, the Court of Appeal held the adjusters are not exempt employees as a matter of law. In doing so, the Court of Appeal misapplied the substantive law. We reverse.


Plaintiffs are claims adjusters employed by Liberty Mutual Insurance Company and Golden Eagle Insurance Corporation (collectively defendants). They filed four class action lawsuits alleging defendants erroneously classified them as exempt "administrative" employees and seeking damages based on unpaid overtime work. The four actions were coordinated into one proceeding by the Judicial Council. Plaintiffs also moved for class certification. The trial court certified a class of "all non-management California employees classified as exempt by Liberty Mutual and Golden Eagle who were employed as claims handlers and/or performed claims-handling activities."

Plaintiffs moved for summary adjudication of defendants' affirmative defense that plaintiffs were exempt from the overtime compensation requirements under IWC wage order No. 4. (Cal. Code Regs., tit. 8, § 11040 (Wage Order 4).) Defendants opposed the motion and moved to decertify the class.

The trial court decertified the class in part, depending on whether plaintiffs' claims arose before or after October 1, 2000, the date the IWC replaced an earlier version of Wage Order 4. The court afforded the disparate treatment because it felt bound by the authority of Bell v. Farmers Ins. Exchange (2001) 87 Cal.App.4th 805 (Bell II) and Bell v. Farmers Ins. Exchange (2004) 115 Cal.App.4th 715 (Bell III) (collectively Bell cases).

For claims arising before October 1, 2000, the trial court decided that the Bell cases compelled a ruling that the claims adjusters were nonexempt "production workers" under the version of Wage Order 4 adjudicated in those cases. (See Bell II, supra, 87 Cal.App.4th at p. 826.) The court decertified the class as to all claims arising after October 1, 2000, the effective date of a new Wage Order 4. The court did not believe the Bell cases applied to the revised version of Wage Order 4 because those cases did not consider the new wage order, nor did they apply the federal regulations specifically incorporated into it. Recognizing that the law was unsettled, the court suggested the parties seek interlocutory review by the Court of Appeal.

Both parties did so. Plaintiffs sought review of the order partially decertifying the class and denying their motion for summary adjudication. Defendants sought review of the trial court's partial denial of their motion to decertify the class.

A divided Court of Appeal issued an order to show cause and ruled for plaintiffs. It directed the trial court to vacate its prior order and enter an order granting plaintiffs' motion for summary adjudication of defendants' affirmative defense and denying defendants' motion to decertify.

The Court of Appeal's analysis focused on Wage Order 4. The majority concluded that, under the terms of that wage order, plaintiffs could not be considered exempt employees, either before or after the order's amendment. As we explain, the wage order cannot be interpreted so categorically. The approach employed by the Court of Appeal majority failed to properly analyze the question.


The IWC is a quasi-legislative agency that regulates aspects of the employment relationship. It promulgates wage orders that provide various exemptions from California's overtime requirements. Labor Code sections 1173, 1178 and 1178.5 authorize the IWC to regulate hours and wages in particular industries. We begin with a review of the wage orders and statutes at issue here.

Wage Order 4, promulgated by the IWC under Labor Code section 1173, appears in California Code of Regulations, title 8, section 11040 (Regulations section 11040). It relates to the hours and wages of those employed in "Professional, Technical, Clerical, Mechanical, and Similar Occupations." For our purposes, Wage Order No. 4-98 (Wage Order 4-1998) covers claims arising before October 1, 2000 and Wage Order No. 4-2001 (Wage Order 4-2001) applies to claims arising thereafter.*fn1

Wage Order 4-1998 made "persons employed in administrative, executive, or professional capacities" exempt from overtime compensation requirements. (Wage Order 4-1998, subd. 1(A).)*fn2 Wage Order 4-1998 did not articulate the precise scope of the administrative exemption. It did, however, limit the exemption to employees "engaged in work which is primarily intellectual, managerial, or creative, and which requires exercise of discretion and independent judgment, and for which the remuneration is not less than $1150.00 per month." (Wage Order 4-1998, subd. 1(A)(1).)

The practical effect of Wage Order 4-1998, and other orders issued by the IWC during that year, was that about eight million workers lost their right to overtime pay because the orders "deleted the requirement to pay premium wages after eight hours of work a day." (Stats. 1999, ch. 134, § 2, subd. (f), p. 1820, enacting Assem. Bill No. 60 (1999-2000 Reg. Sess.).) In response, the Legislature passed the "Eight-Hour-Day Restoration and Workplace Flexibility Act of 1999." (Stats. 1999, ch. 134, § 1, p. 1820, adding and amending provisions of Lab. Code, § 500 et seq.) The act amended Labor Code section 510, which provides that a California employee is entitled to overtime pay for work in excess of eight hours in one workday or 40 hours in one week. (Lab. Code, § 510, subd. (a).) However, Labor Code section 515, subdivision (a), added by the act, exempts from overtime compensation "executive, administrative, and professional employees" whose primary duties*fn3 "meet the test of the exemption," who "regularly exercise[] discretion and independent judgment in performing those duties" and who earn a monthly salary at least twice the state minimum wage for full-time employees. (Ibid.)

Under the statute then, to qualify as "administrative," employees must (1) be paid at a certain level, (2) their work must be administrative, (3) their primary duties must involve that administrative work, and (4) they must discharge those primary duties by regularly exercising independent judgment and discretion. The narrow question here involves the second point, whether plaintiffs' work is administrative. That is, whether it meets the test of the exemption. These statutory standards are further understood in light of the applicable wage order.

Labor Code section 515, subdivision (a) directs the IWC to conduct a review of the duties that meet the test of the exemption and, if necessary, modify the regulations. After review, the Commission issued Wage Order 4-2001.*fn4

A comparison of Wage Order 4-1998 and Wage Order 4-2001 reveals that the latter contains a much more specific and detailed description of work that is properly described as administrative. Whereas Wage Order 4-1998 contains only a single sentence relative to an employee involved in administrative work, Wage Order 4-2001 discusses the scope of the administrative exemption in seven fairly extensive and interrelated subdivisions. (Compare Wage Order 4-1998, subd. 1(A)(1) with Wage Order 4-2001, subd. 1(A)(2)(a)-(g).) Specifically, Wage Order 4-2001, subdivision 1(A)(2)(f) provides that the terms "exempt" and "non-exempt" are to be construed under certain incorporated regulations listed in the federal Fair Labor Standards Act then in effect. So, just as the statute is understood in light of the wage order, the wage order is construed in light of the incorporated federal regulations.

The precise question here is whether plaintiffs' work as claims adjusters is encompassed by the expanded language of the statute, wage orders, and federal regulations that delineate what work qualifies as administrative.

The Administrative Exemption

As part of its function, the IWC issues "Statements As To The Basis" (hereafter, Statement or Commission Statement) explaining "how and why the commission did what it did." (California Hotel & Motel Assn. v. Industrial Welfare Com. (1979) 25 Cal.3d 200, 213.) With respect to Wage Order 4-2001, the Commission Statement notes, "The IWC intends the regulations in these wage orders to provide clarity regarding the federal regulations that can be used [to] describe the duties that meet the test of the exemption under California law, as well as to promote uniformity of enforcement. The IWC deems only those federal regulations specifically cited in its wage orders, and in effect at the time of promulgation of these wage orders, to apply in defining exempt duties under California law." (Italics added.)

Accordingly, Wage Order 4-2001 specifically directs that whether work is exempt or nonexempt "shall be construed in the same manner as such terms are construed in the following regulations under the Fair Labor Standards Act effective as of the date of this order: 29 C.F.R. Sections 541.201-205, ...

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