Harris v. Superior Court: The "Administrative/Production Worker Dichotomy" as litmus test for the administrative exemption

The recent Harris v. Superior Court opinion dealt with that most-litigated species of employee – the California claims adjuster. And the only legal issue on appeal was the proper construction and application of the single phrase limiting exempt administrative duties to those that are “directly related to management policies or general business operations.” Nevertheless, the case deals a serious blow to the viability of the administrative exemption for all employers in California. 

The Court began its analysis by surveying the exemption language of the California Wage Orders, federal regulations under the Fair Labor Standards Act and the substantial body of state and federal case law. I won’t retrace the tortuous semantic analysis that follows. Suffice it to say, however, that the majority concluded that the so-called “administrative/production” dichotomy is the correct test to apply. 

Many of the federal courts that originally developed and applied the “dichotomy” terminology considered it to be as a mere guidepost or analytical tool. But Harris elevates the distinction to the status of a legal litmus test for determining who may be exempt. At the same time it elevated the status of the “dichotomy” test, it also made the test far more restrictive. Indeed, according to the majority’s vision of the workplace, the vast majority of white collar employees will always qualify only as mere “production” workers because they inevitably spend their time on “day-to-day” business rather than determining how the business should operate “at the level of management policy or general operations.” 

As applied to the adjusters at issue in the case, the Court held that they could not be exempt because the work they did, although clearly sophisticated and important, was deemed to be a frequent part of the employer’s core business.

The undisputed facts show that plaintiffs are primarily engaged in work that falls on the production side of the dichotomy, namely, 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 so forth. None of that work is carried on at the level of management policy or general operations. Rather, it is all part of the day-to-day operation of defendants' business.

Moreover, the Court also took pains to emphasize that the test should not depend on the nature of the employer’s business but rather on the level at which the employee operates.

[T]he phrase “ administrative/production worker dichotomy” is misleading. Properly understood, 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. Thus, any office or nonmanual work that is not at the level of policy or general operations constitutes production work for purposes of the dichotomy, regardless of how loosely or intimately the work is connected with producing the employer's product.

The Harris decision thus represents a severe restriction on the use of the administrative exemption in California. Moreover, employers must remember that the “administrative/production worker dichotomy” discussed in Harris is merely one of the elements that must be satisfied. For example, it is also the employer’s burden to establish that the employee “customarily and regularly exercises discretion and independent judgment” and performs under only “general supervision.” 

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