Exemptions from Wage and Hour Requirements: Administrative Employees

The federal and state exemptions for administrative employees are phrased similarly, but may differ in their application to particular jobs. The federal standard appears in 29 CFR section 541.200, which provides that an administrative employee is one (1) who is paid a salary of at least $455 per week, (2) whose primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers, and (3) whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. Management and general business operations are defined in section 541.201, and discretion and independent judgment in section 541.202.

Under the definition in the California wage orders, an administrative employee is one (1) whose duties and responsibilities involve either (a) performance of office or non-manual work directly related to management policies or general business operations of his/her employer or his/her employer’s customer, or (b) the performance of functions in the administration of a school system, or educational establishment or institution, or of a department or subdivision thereof, in work directly related to the academic instruction or training carried on therein, and (2) who customarily and regularly exercises discretion and independent judgment, and (3) who regularly and directly assists a proprietor, or an employee employed in a bona fide executive or administrative capacity, or who performs under only general supervision work along specialized or technical lines requiring special training, experience, or knowledge, or who executes under only general supervision special assignments and tasks, and (4) who is primarily engaged in duties that meet the test of the exemption, and (5) who earns a monthly salary equivalent to no less than two times the minimum wage, which equates to $640 per week. The wage orders point to the federal regulations for guidance on the definition.

Section 541.203 of the federal regulations contains examples of some jobs that do and do not meet the test for the exemption. In addition to the examples given there, the Administrator of the Department of Labor's Wage and Hour Division Administrator has opined in FLSA 2010-1 that the exemption generally does not apply to mortgage loan officers.

Illustrative of the difficulties of applying the federal and the state exemptions are cases involving insurance claims adjusters. Section 541.203 states that they generally meet the duty requirement of the exemption "if their duties include activities such as interviewing insureds, witnesses and physicians; inspecting property damage; reviewing factual information to prepare damage estimates; evaluating and making recommendations regarding coverage of claims; determining liability and total value of a claim; negotiating settlements; and making recommendations regarding litigation."

In a case decided under an earlier version of the wage orders the California Court of Appeal refused to apply the exemption to claims adjusters, ruling that they were involved in production, rather than administrative work. See Bell v. Farmers Ins. Exchange, 115 Cal.App.4th 715 (2004);  But, last year, in Harris v. Superior Court, 53 Cal. 4th 170 (2011), the California Supreme Court directed California courts to refrain from using the production/administrative dichotomy as the sole determinative factor in applying the exemption, pointing to a more elaborate explanation of the exemption in the current version of the wage orders. The Supreme Court did not determine whether the employees in the case before it were exempt, just that the Court of Appeal had applied the wrong analysis.

UPDATE [7/23/2012]


On remand, the Court of Appeal in the Harris case applied the Supreme Court's analysis, and again determined that the claims adjusters did not fall within the administrative exemption. "The undisputed facts show that Adjusters are primarily engaged in work that fails to satisfy the qualitative component of the ―directly related‖ requirement because their primary duties are the day-to-day tasks involved in adjusting individual claims. They investigate and estimate claims, make coverage determinations, set reserves, negotiate settlements, make settlement recommendations for claims beyond their settlement authority, identify potential fraud, and the like." See  Harris v. Superior Court, Case No. B195121 (Cal. Ct. App. 7/23/2012).

Exemptions from Wage and Hour Rules in California

The California rules on exemptions differ in several respects from those under the federal Fair Labor Standards Act. In most respects the California rules take a narrower view of the exemptions. In one notable circumstance, the FLSA standard is more favorable to employees. Employers in  California must follow the rule that takes the narrowest view of the exemption.

White Collar Exemptions

There are exemptions for executive, administrative and professional employees under both state and federal law, but the specifics differ. Under both standards, the exempt employee generally must be salaried. The federal minimum is $455 per week. The state minimum is two times the state minimum wage (currently $8 per hour) for a 40-hour work week. That calculates to $2773 per month. Federal law requires that the exempt employee's primary duty fall within those by which the exemption is defined. State law requires that the exempt employee devote more than half his or her time to the defined duties.

Executive Exemption. The defined duties are essentially the same. The exempt employee (1) must manage the enterprise, or a customarily recognized department or subdivision of the enterprise, (2) must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent, and (3) must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

Administrative Exemption. The defined duties are essentially the same, but the application to specific jobs differs. The exempt employee must (1) perform office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers and  (2) must exercise of discretion and independent judgment with respect to matters of significance. Although insurance claims representatives are exempt under the federal standards, they are not under the state standard. See Bell v. Farmers Ins. Exchange, 87 Cal.App.4th 805, 105 Cal.Rptr.2d 59 (2001).

Professional Exemption. Again, the defined duties are essentially the same, but the application to specific jobs differs. The exempt employee (1) must perform work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment, (2) the advanced knowledge must be in a field of science or learning, and (3) the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual
instruction. Licensed professionals in the fields of law, medicine, dentistry, optometry, architecture, engineering, teaching, or accounting are exempt under both standards. Pharmacists are exempt professionals under federal law, but not under state law. Registered nurses are exempt professionals under federal law, but, under state law, only licensed nurse practitioners are.

Computer Professionals

Both federal and state law exempt highly skilled computer specialists who perform high-level duties. Under federal law they must earn at least $455 per week, or $27.63 per hour. Under state law, they must earn $38.89 per hour or annual salary of not less than $81,026.25 for full-time employment, and paid not less than $6,752.19 per month.

Outside Sales Persons

Under the FLSA, a salesperson is exempt if his or her primary duty is making sales, or obtaining orders or
contracts for services or for the use of facilities for which a consideration will be paid by the client or
customer, and he or she is customarily and regularly engaged away from the employer’s place of
business. State law has a similar exemption, but expressly requires that the employee spend more than half his or her time away from the employer's place of business.

Commissioned Employees

Under state law, an employee is exempt if more than half his or her compensation is commissions, and he or she earns at least one and a half times minimum wage. Under the FLSA, the commissioned employee exemption is limited to employees of retail or service establishments; auto, truck, trailer, farm implement, boat, or aircraft sales-workers; or parts-clerks and mechanics servicing autos, trucks, or farm implements, who are employed by non-manufacturing establishments primarily engaged in selling these items to ultimate purchasers. As a result, under federal law, employees of brokerage and financial services firms cannot qualify for the commissioned employee exemption.

Highly Compensated Employees

Department of Labor regulations promulgated under the FLSA provide an exemption for highly compensated employees performing office or non-manual work and paid total annual compensation of $100,000, if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests for exemption. There is no such exemption under state law.

California Supreme Court Punts On Clarifying Exemption Rules

California Supreme Court

The California Supreme Court has passed on an opportunity to provide California employers with clear guidelines for applying the exemptions from the state's wage and hour rules. In Harris v. Superior Court, Case No. S156555 (Dec. 29, 2011), the Court chastised the Court of Appeal for applying an "administrative/production worker dichotomy" as a dispositive test for the administrative exemption, but declined to provide any usable tests of its own.

The case was a class action on behalf of claims adjusters for Liberty Mutual and Golden Eagle. Guided by two decisions in another claims adjuster class action against Farmers Insurance (Bell II and Bell III), the Court of Appeal ordered the employers' exemption defense stricken. For the Court of Appeal, the dispositive question was whether the claims adjusters were administrative workers or production workers. Although there was evidence that the adjusters' work in Harris was not routine and unimportant, they fell on the production side because their work -- investigating claims, determining coverage and setting reserves -- was not carried on at the level of policy or general operations.

The Supreme Court ruled that the lower court should have paid closer attention to changes in wage and hour law after the Bell litigation had gotten under way. In 1999, the California Legislature amended the Labor Code to reinstitute daily overtime, and directed the Industrial Welfare Commission to review the duties that met the test of the administrative, executive and professional exemptions. In 2001, the IWC adopted new wage orders that provided a more detailed explanation of what constituted administrative work than the previous wage orders. The wage orders are available at the IWC's website. The new wage orders stated that the activities constituting exempt work "shall be construed in the same manner as such terms are construed in the following regulations under the Fair Labor Standards Act effect as of the date of this order: 29 C.F.R. Sections 541.201-205, 541.207-208, 541.210 and 541.215."

The text of the new wage orders combined with the language of the cited federal regulations led the Supreme Court to conclude that there are two components to the part of the definition requiring that administrative work be directly related to management policies or general business operations. The work must be qualitatively administrative, and quantitatively of substantial importance to the management or operations of the business. Administrative work includes work done by white collar employees engaged in servicing a business, which may include advising management, planning, negotiating and representing the company. In light of those principles, it was inappropriate to adopt the administrative/production dichotomy as a dispositive test.

In the end, the Court declined to adopt any bright line rules. "The essence of our holding is that, in resolving whether work qualifies as administrative, courts must consider the particular facts before them and apply the language of the statutes and wage orders at issue." It also declined to rule whether the claims adjusters in the case before it were exempt. "We express no opinion on the strength of the parties' relative positions. We merely hold that the Court of Appeal majority erred in its analysis."