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Ninth Circuit Rules Claims Adjusters Are Exempt from Overtime under the FLSA

  • November 15, 2006

Handing employers a decisive victory, the U.S. Court of Appeals for the Ninth Circuit ended five years of class litigation, holding that 2,000 current and former claims adjusters were exempt from overtime under the Fair Labor Standards Act and the U.S. Department of Labor's regulations. In re: Farmers Ins. Exch. Claims Representatives' Overtime Pay Litig., Nos. 05-35080 & 05-35145 (9 th Cir. Oct. 26, 2006). The court found that the adjusters who handled automobile claims, non-automobile property damage claims, personal injury claims, and other claims fell squarely within 29 C.F.R. § 541.203, the DOL's 2004 regulation regarding insurance adjusters. The court further ruled that neither the type nor size of claims handled was dispositive in determining whether the adjusters were exempt.

The employer is an "inter-insurance exchange," performing all of the functions of a typical insurance company, including selling policies, procuring reinsurance, and adjusting claims. Approximately 50% of the employees are claims adjusters and are classified at one of three levels depending on experience and performance – claims adjuster, senior claims adjusters, and special claims adjuster. Although their duties are essentially the same, the various claims adjusters have different levels of settlement authority. On any given claim, a supervisor can raise an adjuster's settlement authority. Claims adjusters use software to help them estimate losses, and the employer provides adjusters with written policies and guidelines to assist them in the claims handling process. The employer classified all of the adjusters as exempt and paid them on a salary basis.

In late 2001 and early 2002, a group of claims adjusters sued the employer under the FLSA and various state wage and hour laws for alleged unpaid overtime. Following a three-week trial before the U.S. District Court for the District of Oregon, the court ruled that most of the claims adjusters were non-exempt. Significantly, the district court's findings turned on the size and type of claims handled by the claims adjusters. For example, the court held that all property adjusters were non-exempt if more than 50% of their monthly payouts were less than $3,000. The court awarded nearly $52.5 million to the adjusters in unpaid overtime; appeals followed.

On appeal, the Ninth Circuit reviewed the FLSA administrative exemption to determine whether the claims adjusters' duties fell within it. To fall within the exemption, the employee's primary duty must consist of office or non-manual work related to the management policies or general business operations of the employer and must include the exercise of discretion and independent judgment. The parties did not dispute that the claims adjusters did perform office or non-manual work; rather, the dispute involved whether they satisfied the remaining portion of the duties test.

In analyzing this issue, the Ninth Circuit reviewed language in the DOL's 2004 regulation regarding claims adjusters. The regulation states, in relevant part, that claims adjusters "generally fall within the administrative exemption" if their duties involve "interviewing insureds, witnesses, or physicians; inspecting property damage; reviewing factual information to prepare damage estimates; evaluating and recommending coverage; determining liability and total value of a claim; negotiating settlements; and making recommendations regarding litigation." 29 C.F.R. § 541.203. The district court had not considered the regulation in its analysis "presumably because it was not in effect" when the plaintiffs filed the lawsuit; however, the Ninth Circuit determined that regulation did not "represent a change in the law," and it was useful in its analysis.

Turning to the district court's findings, the court found that the claims adjusters fell within the DOL's regulation. Specifically, the claims adjusters determined whether a policy covered a particular loss; recommended a reserve based on the liability exposure; interviewed insureds and others; negotiated settlements; advised regarding potential fraud, subrogation, and underwriting risk; and communicated with counsel. Although the claims adjusters did not make recommendations regarding litigation, the court noted that regulation did not require the adjuster to perform every listed activity. Moreover, although the adjusters needed supervisory approval before denying a claim or to obtain additional settlement authority, the court still found that the claims adjusters exercised discretion and independent judgment. The court stated that "discretion and independent judgment did not necessarily imply that the decisions made by the employee have a 'finality that goes with unlimited authority and a complete absence of review.'"

Further, the claims adjusters' use of computer software and other employer-provided guidance to estimate and handle claims did not eliminate their discretion and independent judgment. Their decisions bore directly on the employer's business -- the employer could be subject to fines if reserves were set too low – and their decisions impacted policy-holders and the employer's reputation with the insurance-buying public.

Last, the appellate court rejected the district court's rule for determining exempt status based on the size and amounts of the claims, noting that "nothing in the regulation suggests that 'smaller' claims should be treated differently." Ultimately the Ninth Circuit rejected the district court's conclusion that the claims adjusters were non-exempt, dismissed their claims under the FLSA and parallel state laws, and sent back to the trial court their claims under Oregon, Colorado and Minnesota law to consider whether the employer satisfied more restrictive state law requirements for the administrative exemption.

Opposite Conclusion by State Court Is Controlling in California

By contrast, in Bell v. Farmers Ins. Exch., 87 Cal. App. 4 th 805 (Cal. Ct. App. 2001), the California Court of Appeal held that claims adjusters were non-exempt under California wage hour law. Notwithstanding that it looked to federal law in interpreting California law, the Court of Appeal analyzed the facts using a framework known as the administrative/production dichotomy. Under this framework, the court examined whether the functions performed by the claims adjusters were directly related to management policies or the general business operations of the employer, or whether the functions involved producing commodities, goods, or services.

The court narrowly viewed the role of the claims adjusters within the overall operations of the employer. Because the claims adjusters did not sell insurance and did not establish policies regarding claims handling, the California court found that their work fell on the "production" side of the dichotomy. The court was not influenced by the fact that the adjusters' other functions, such as determining coverage, reserves, estimating losses, providing risk advice, identifying potential fraud, subrogation rights, and underwriting risks, directly impacted the employer's business operations. While the Ninth Circuit criticized the court's decision in the Bell case, it remains the controlling law for California employers.

For employers in the Ninth Circuit outside of California – Alaska, Arizona, Hawaii, Idaho, Montana, Nevada, Oregon and Washington -- this decision provides welcome guidance regarding the exempt status of claims adjusters. California employers, however, need to remain vigilant regarding compliance with California's Wage Orders and Labor Code with respect to exempt administrative employees.

For additional information regarding this decision, or general compliance with state and federal wage and hour laws in the Ninth Circuit, please contact the Jackson Lewis attorney with whom you regularly work, or the following West Coast attorneys:

Portland: Scott Oborne,; Seattle: Karen Kruse,; Los Angeles: Lawrence Stone,; Orange County CA: Jonathan Siegel,; San Francisco: Jamerson Allen,

©2006 Jackson Lewis P.C. This material is provided for informational purposes only. It is not intended to constitute legal advice nor does it create a client-lawyer relationship between Jackson Lewis and any recipient. Recipients should consult with counsel before taking any actions based on the information contained within this material. This material may be considered attorney advertising in some jurisdictions. Prior results do not guarantee a similar outcome.

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