Appellate Court Holds Network Director For Start-up Company Was Properly Classified As Exempt Employee

In a recently published opinion, Combs v. Skyriver Communications, Inc., the plaintiff Mark Combs appealed a judgment against him in an action to recover overtime pay and meal and rest breaks. He alleged that he was misclassified as an exempt employee while working for Skyriver Communications, Inc. (Skyriver). He sued Skyriver and its chief executive officer for the unpaid wages under three causes of action: . (1) violation of Labor Code sections 510 and 1194 and applicable Industrial Welfare Commission (IWC) wage orders; (2) violation of the Unfair Competition Law (the UCL) (Bus. & Prof. Code, § 17200 et seq.); and (3) penalties under the Private Attorneys General Act of 2004 (the PAGA) (§ 2698 et seq.). Combs sought to hold Skyriver’s CEO liable on an alter ego theory.

The employer, Skyriver is a high-speed, wireless, broadband internet service provider. When Combs worked for Skyriver, it was a “young start-up company” and Combs was the first manager for capacity planning, and then became the director of network operations. He voluntarily resigned in November 2004.

Combs alleged the trial court committed an error by failing to apply the administrative/production worker dichotomy pertaining to the administrative exemption from IWC overtime compensation requirements, which was set forth in Bell v. Farmers Insurance Exchange (2001) 87 Cal.App.4th 805, cert. denied 534 U.S. 1041 (Bell II). Combs also contends that application of the Bell II dichotomy would have resulted in a determination that Combs was a production worker, not an administrator, and thus that he was not administratively exempt.

Administrative/Production Dichotomy Defined
As the appellate court explained, the administrative/production dichotomy was defined in the Bell II case when the court drew "a distinction between administrative employees, who are usually described as employees performing work 'directly related to management policies or general business operations of his employer or his employer's customers,' and production employees, who have been described as 'those whose primary duty is producing the commodity or commodities, whether goods or services, that the enterprise exists to produce.' [Citation.]" (citing Bell II, supra, 87 Cal.App.4th at p. 820, fns. omitted.) Therefore, under this framework, employees who produce the company’s goods or services cannot qualify as exempt administrative employees.

However, this test has become more and more difficult to apply given today’s new technology, more “flat” organizational structures within companies, and the fact that with the advent of computers and the internet, it is often times hard to exactly describe what a company’s product actually is. The appellate court recognized this difficulty, and explained that the Bell II court further explained that dichotomy's "somewhat gross distinction" between administrative employees and production employees "may not be dispositive in many cases," and warned that it should be applied with "great caution." (citing Bell II at pp. 826-827.)

Combs claimed that the administrative/production dichotomy was "binding [legal] precedent" and that the courts were required to apply this framework to his case. However, the appellate court disagreed and held that:
Combs's reliance on Bell II and Bell III is unavailing because those cases are factually and legally distinguishable. They are factually distinguishable in that the class plaintiffs in that litigation were former and current insurance claims adjusters who worked in California branch claims offices and, according to their employer's own characterization in its regional claims manual, their job responsibilities were restricted to the "handling of the routine and unimportant." (Bell II, supra, 87 Cal.App.4th at pp. 827-828, italics added.) In upholding the trial court's determination that the claims adjusters were production, not administrative, employees within the meaning of the administrative exemption set forth in former IWC Wage Order No. 4, the appellate court in Bell II concluded that the record as a whole confirmed that the claims adjusters were "ordinarily occupied in the routine of processing a large number of small claims," and "[o]n matters of relatively greater importance, they [were] engaged only in conveying information to their supervisors—again primarily a 'routine and unimportant' role." (Bell II, supra, 87 Cal.App.4th at p. 828, italics added.) Here, however, as we shall explain, post, there is no evidence to show that Combs's responsibilities at Skyriver were limited to "the routine and unimportant."
The appellate court explained that Combs's job responsibilities were high-level and important. The trial record showed that Combs performed "specialized functions" that, unlike the "routine and unimportant" functions performed by the claims adjusters in the Bell cases, could not be readily categorized in terms of the administrative/production worker dichotomy. Evidence showed that the wide variations in Combs's job responsibilities called for "finer distinctions than the [Bell II] administrative/production worker dichotomy provides." The evidence also showed that Skyriver's corporate administrators commonly worked side-by-side with employees who were not administrative employees, and there is no evidence in the record to show that Combs's job responsibilities were limited to "the routine and unimportant" as was the case in Bell II. Therefore, the appellate court upheld the trial court's decision to not apply the administrative/production worker dichotomy

Administrative Exemption Test
The court then turned to analyze Combs’s claim under the requirements of the administrative exemption test. Combs conceded that he earned a monthly salary equivalent to no less than twice the state minimum wage (he earned between $70,000 and $90,000 per year) for full-time employment, that his worked was “office or non-manual work,” and that he performed his work “under only general supervision [and] along specialized or technical lines requiring special training experience or knowledge.”

Combs, however, challenged that Skyriver failed to prove the remaining "critical" elements of the “duties test” that are required to meet the administrative exemption.

    a. Work "directly related to management policies or general business operations"
Combs contended that his work did not rise to the level of being related to management policies or general business operations. The court disagreed. Combs was responsible for maintaining, developing and improving Skyriver's network, and his duties involved high-level problem solving, preparing reports for Skyriver's board of directors, capacity and expansion planning, planning for the integration of acquired networks into Skyriver's network, lease negotiations, and equipment sourcing and purchasing.

The appellate court also emphasized that Combs's own resume and his trial testimony showed that his job functions as manager of capacity planning included "network planning"; design of network operations center (NOC) policies and procedures; "project management, budgeting, vendor management, purchasing, forecasting[, and] employee management"; management of "overseas deployment of wireless data network"; among other duties.

    b. Customary and regular exercise of discretion and independent judgment
Combs testified that he spent 60 to 70 percent of his time on his core responsibility of maintaining Skyriver's network. Witnesses from Skyriver testified that Combs, in carrying out his role of "troubleshooting an issue with [Skyriver's] network," had "the authority to determine the course of action to correct the problem." The court again turned to Combs’ resume and found that the job responsibilities he listed “also supported a finding that he customarily and regularly exercised discretion and independent judgment with respect to matters of significance.”

    c. Primary engagement in duties that meet the administrative exemption test
The term "primarily" is defined to mean "more than one-half the employee's work time." (Cal. Code Regs., tit. 8, § 11040, subd. 2(N).) Combs himself testified that he spent 60 to 70 percent of his time on his core responsibility of maintaining the well-being of Skyriver's network. As the court set forth above, this type of activity is both "work directly related to assisting with the running or servicing of the business," and work that includes "computer network, internet and database administration" within the meaning of 29 Code of Federal Regulations 541.201 (which is the federal regulation incorporated in IWC Wage Order No. 4-2001). Therefore, the court held that Combs did in fact spend more than 50 percent of his time performing duties that meet the administrative exemption.

Lessons From This Case
  1. The administrative exemption is alive and well.
  2. Start-up companies and technology companies should be able to use this holding in order to urge courts to not apply the administrative/production dichotomy – which should increase the likelihood that an employee meets the requirements for the administrative exemption.
  3. An employee’s resume explaining their duties while working at a former company in a misclassification case is valuable evidence. It lists their true duties while they worked at a former job – which is probably a much more accurate description than they will testify to during litigation.
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