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The administrative exemption established by California’s Industrial Welfare Commission (“IWC”) permits employers to exempt certain employees from overtime if the employees satisfy several requirements.  Since the IWC issued its Wage Order in 2001 expounding on the requirements necessary to qualify for this exemption, attorneys, employers and courts have been perplexed as to the meaning of one of these requirements—that the employee perform “office or non-manual work directly related to management policies or general business operations” of the employer or its customers. 
 
A recent California Second District Court of Appeal decision shed light on the meaning of this requirement.  Harris v. Superior Court, 154 Cal.App.4th 164 (2007).  In order to satisfy this requirement, the employee’s work must be: (1) “administrative, as opposed to production, work,” and (2) “of substantial importance to the management or operation of the business.”  The first half of this test has caused the most confusion and is commonly referred to in case law as the “administrative/production worker dichotomy.”  The Harris court explained that “work performed at the level of policy or general operations” qualifies as administrative work, whereas “work that merely carries out the particular, day-to-day operations of the business is production, not administrative work.”  Applying this standard to insurance claims adjusters’ coordinated class actions against insurance companies to recover overtime compensation, the court concluded that the claims adjusters are involved in the “day-to-day tasks involved in adjusting claims” and therefore their primary tasks, including investigating and estimating claims, negotiating settlements, and investigating fraud, fall on the production side of the dichotomy.  
 
The court rejected the insurance companies’ argument that the adjusters’ work falls on the administrative side of the dichotomy because the adjusters do not produce the defendants’ product, namely the transference of risk.  The court acknowledged that the term “administrative/production worker dichotomy” is misleading because “the dichotomy is not between workers engaged in ‘production’ (e.g., factory workers) and workers engaged in ‘administration’ (e.g., office workers).  Rather it is between office or nonmanual work that is at the level of policy or general operations and office or nonmanual work that is not.”  In short, “producing the employer’s product is not a necessary condition for doing production.”  On the other hand, producing the employer’s product necessarily means that the employee is doing production, unless the employer’s product is itself an administrative service (e.g., financial or management consulting).  
 
Although the appellate decision clarified what work does not qualify as administrative work, it did not elucidate what work would qualify as administrative.   Although a federal regulation (29 C.F.R. section 541.205(c)) purports to provide examples of such work, and specifically references insurance claims adjusters, the appellate court stated that this section relates only to the “substantial importance requirement” half of the “directly related” test and not, the administrative/production worker dichotomy.  
 
Despite the cloud that still floats over the precise meaning of administrative work, some examples that the court referenced provide guidance for employers.  Specifically, the court indicated that the following types of work performed by the claims adjusters might fall on the administrative side of the dichotomy:  (1) consulting with claims examiners as to whether to issue certain types of policies; and (2) participating on committees that may influence business policies and practices, such as a committee formed to develop an integrated special investigation unit task force, or a committee that makes recommendations on how to improve the business.  
 
Another recent appellate decision provides additional guidance on tasks that would qualify as administrative work.  Eicher v. Advanced Business Integrators, Inc., 151 Cal.App.4th 1363 (2007).  The Eicher court found that a computer software consultant’s duties, which primarily involved providing customer service and training and the routine implementation of software to best meet customer needs, did not qualify as administrative because such work constituted the “core day-to-day business” of the employer.  Notably, the consultant did not hire or fire employees, negotiate contracts with customers, or consult with the employer or its customers about business policies or practices.  The court indicated that the duties of a consultant with more managerial responsibilities who had an impact on how the business was run would qualify as administrative ( e.g., consultant who “coordinated, designed, and implemented projects, not only working with customers but also identifying impacts and designing and coordinating project teams.”).  In short, to qualify as administrative, the employee’s work must influence the policies, business goals, or general business operations of the employer or its customers.  As noted in Eicher, an employee with more managerial responsibilities is more likely to meet this test, whereas an employee who primarily performs routine tasks will not.
 
Although examples of jobs that would likely fall on the administrative side of the dichotomy are helpful, they are not dispositive.  Employers should classify employees as administratively exempt or nonexempt on a case by case basis.  A particular job title, or the fact that an employee does not produce the employer’s products, does not control; rather, the decision turns on the particular job duties and responsibilities of the employee.  For instance, the work of some senior claims adjusters might fall on the administrative side of the dichotomy, while the work of junior adjusters would not qualify as administrative.  Because California law requires the narrow interpretation of exemption statutes to protect employees, employers need to be especially careful in ensuring that the work of employees classified as administratively exempt properly qualifies as administrative work, as opposed to production.

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