California employers’ decisions to classify workers as “exempt” from overtime and other wage-hours laws are among the most commonly litigated claims. There is ample ground for disputes between lawyers and their clients. Determining whether an employee is properly classified as exempt is fact-specific and requires applying vague and confusing laws and regulations.

Recently, the California Supreme Court issued its much-anticipated decision in Harris v. Superior Court, offering employers some welcome guidance regarding application of the “administrative exemption,” and specifically, use of the so-called “administrative/production worker dichotomy” in determining whether employees may qualify as administratively exempt.

The Administrative Exemption and the “Administrative/Production Worker Dichotomy”

Under the California Industrial Welfare Commission’s Wage Orders, an employee may qualify as “exempt” under the “administrative” test if he or she performs “office or non-manual work directly related to management policies or general business operations of his/her employer or his/her employer’s customers.” Employees may meet this requirement if they perform work activities “relating to the administrative operations of a business.” So, employees engaged in “production” or “sales” work, will not be considered exempt under the “administrative” test.

When litigating cases over exempt classification, the parties often dispute whether the employee’s work is truly administrative or whether it is production work.

The courts have drawn a line between administrative employees primarily engaged in “administering the business affairs of the enterprise” and production-level employees whose “primary duty is producing the commodity or commodities, whether goods or services, that the enterprise exists to produce and market.” The courts refer to this distinction as the “administrative /production dichotomy.” The California Supreme Court first considered this analysis in its opinion in the Harris decision.

The Facts and Lower Courts’ Decisions

The plaintiffs in Harris worked as insurance claims adjusters. They filed a class action lawsuit seeking unpaid overtime pay, based on their employers’ decisions to classify them and other class members as exempt administrative employees.

The Court of Appeal found that the employees could not be classified as exempt. Relying heavily on the administrative/production worker dichotomy, the court decided that the claims adjusters performed non-exempt “production” work as a matter of law. That is because their job of investigating, adjusting and settling claims was part of the “product” sold by their employer (insurance policies).

The Court of Appeal also opined that only work performed at the level of policy or general business operations can qualify under the administrative exemption as “directly related to management policies or general business operations.” The Court of Appeal reasoned that claims adjusters’ work merely carried out the day-to-day operations of the business, and was therefore non-exempt.

The California Supreme Court’s Decision

The California Supreme Court unanimously reversed the Court of Appeal’s decision. In important part, the Court held that the lower court had relied too much on the administrative/production dichotomy. The Court emphasized that whether the exemption applies must be determined first-and-foremost under the language of the wage orders and federal regulations they incorporate. The “dichotomy” analysis is not contained in the Wage Orders or federal regulations, but rather was created by courts.

That said, the Court did not hold that the dichotomy test never may be considered.

The Court wrote: “The majority below provided its own gloss to the administrative/ production worker dichotomy and used it, rather than applying the language of the relevant wage order and regulations. Such an approach fails to recognize that the dichotomy is a judicially created creatureäó_which has been effectively superseded by the more specific and detailed statutory and regulatory enactments.”

Significantly, the Supreme Court also admonished the Court of Appeal for taking an overly narrow stance on what constitutes “work directly related to management policies or general business operations.” The Court held an employee’s work may qualify as exempt even if it is not performed at the corporate policy level. Thus, the Court recognized that non-management employees whose work involves “advising management, planning, negotiating, and representing the company,” may, in certain circumstances, be administratively exempt.

Ultimately, the Court sent the case back to the Court of Appeal to carefully consider “the particular facts before them” and to apply the language of the statutes and wage orders at issue” to determine whether the plaintiffs had been properly classified as exempt.

Applying Harris

Harris provides employers with needed guidance regarding how to analyze whether an employee is properly classified as exempt. Harris instructs us to consult the applicable Wage Order’s text and the federal regulations in effect when the IWC issued the Wage Order. The opinion also limits application of the troublesome administrative/ production dichotomy and rejects the “policy maker” limitation on the exemption.

The opinion, however, leaves much room for interpretation and more debate over the bona fides of an exemption under administrative test. The administrative/production worker dichotomy remains alive, although weakened. The Court in Harris left open the possibility that the dichotomy may still be used as an analytical tool, in certain cases.

Moreover, properly classifying an employee as exempt involves meeting other standards not specifically at issue in Harris, such as ensuring the employee exercises “independent discretion and judgment” in the performance of his/her duties, and paying the employee a predetermined salary, in an amount equal to at least twice California’s minimum wage. As with all wage-hour law issues, employers should fully consider the applicable law and rules before making an error that could result in expensive wage-hour litigation.

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