Harris v. Superior Court

Filed 12/29/11

IN THE SUPREME COURT OF CALIFORNIA

FRANCES HARRIS et al., )

)

Petitioners, )

) S156555

v. )

) Ct.App. 2/1 B195121

THE SUPERIOR COURT OF )

LOS ANGELES COUNTY, ) Los Angeles County

) Super. Ct. No. BC 246139

) JCCP No. 4234

Respondent; )

)

LIBERTY MUTUAL INSURANCE )

COMPANY et al., )

)

Real Parties in Interest. )

___________________________________ )

)

LIBERTY MUTUAL INSURANCE )

COMPANY et al., ) Ct.App. 2/1 B195370

)

Petitioners, ) Los Angeles County

) Super. Ct. No. BC 246140

v. ) JCCP No. 4234

)

THE SUPERIOR COURT OF )

LOS ANGELES COUNTY, )

)

Respondent; )

)

FRANCES HARRIS et al., )

)

Real Parties in Interest. )

___________________________________ )

1

This litigation tests whether certain insurance company claims adjusters are exempt

employees, not entitled to overtime compensation under the Labor Code and regulations

of the California Industrial Welfare Commission (IWC or Commission). Reviewing the

trial court‘s denial of a summary adjudication motion, the Court of Appeal held the

adjusters are not exempt employees as a matter of law. In doing so, the Court of Appeal

misapplied the substantive law. We reverse.

FACTS

Plaintiffs are claims adjusters employed by Liberty Mutual Insurance Company and

Golden Eagle Insurance Corporation (collectively defendants). They filed four class

action lawsuits alleging defendants erroneously classified them as exempt

―administrative‖ employees and seeking damages based on unpaid overtime work. The

four actions were coordinated into one proceeding by the Judicial Council. Plaintiffs also

moved for class certification. The trial court certified a class of ―all non-management

California employees classified as exempt by Liberty Mutual and Golden Eagle who

were employed as claims handlers and/or performed claims-handling activities.‖

Plaintiffs moved for summary adjudication of defendants‘ affirmative defense that

plaintiffs were exempt from the overtime compensation requirements under IWC wage

order No. 4. (Cal. Code Regs., tit. 8, § 11040 (Wage Order 4).) Defendants opposed the

motion and moved to decertify the class.

The trial court decertified the class in part, depending on whether plaintiffs‘ claims

arose before or after October 1, 2000, the date the IWC replaced an earlier version of

Wage Order 4. The court afforded the disparate treatment because it felt bound by the

authority of Bell v. Farmers Ins. Exchange (2001) 87 Cal.App.4th 805 (Bell II) and Bell

v. Farmers Ins. Exchange (2004) 115 Cal.App.4th 715 (Bell III) (collectively Bell cases).

For claims arising before October 1, 2000, the trial court decided that the Bell cases

compelled a ruling that the claims adjusters were nonexempt ―production workers‖ under

the version of Wage Order 4 adjudicated in those cases. (See Bell II, supra, 87

2

Cal.App.4th at p. 826.) The court decertified the class as to all claims arising after

October 1, 2000, the effective date of a new Wage Order 4. The court did not believe the

Bell cases applied to the revised version of Wage Order 4 because those cases did not

consider the new wage order, nor did they apply the federal regulations specifically

incorporated into it. Recognizing that the law was unsettled, the court suggested the

parties seek interlocutory review by the Court of Appeal.

Both parties did so. Plaintiffs sought review of the order partially decertifying the

class and denying their motion for summary adjudication. Defendants sought review of

the trial court‘s partial denial of their motion to decertify the class.

A divided Court of Appeal issued an order to show cause and ruled for plaintiffs. It

directed the trial court to vacate its prior order and enter an order granting plaintiffs‘

motion for summary adjudication of defendants‘ affirmative defense and denying

defendants‘ motion to decertify.

The Court of Appeal‘s analysis focused on Wage Order 4. The majority concluded

that, under the terms of that wage order, plaintiffs could not be considered exempt

employees, either before or after the order‘s amendment. As we explain, the wage order

cannot be interpreted so categorically. The approach employed by the Court of Appeal

majority failed to properly analyze the question.

DISCUSSION

The IWC is a quasi-legislative agency that regulates aspects of the employment

relationship. It promulgates wage orders that provide various exemptions from

California‘s overtime requirements. Labor Code sections 1173, 1178 and 1178.5

authorize the IWC to regulate hours and wages in particular industries. We begin with a

review of the wage orders and statutes at issue here.

Wage Order 4, promulgated by the IWC under Labor Code section 1173, appears in

California Code of Regulations, title 8, section 11040 (Regulations section 11040). It

relates to the hours and wages of those employed in ―Professional, Technical, Clerical,

3

Mechanical, and Similar Occupations.‖ For our purposes, Wage Order No. 4-98 (Wage

Order 4-1998) covers claims arising before October 1, 2000 and Wage Order No. 4-2001

1

(Wage Order 4-2001) applies to claims arising thereafter.

Wage Order 4-1998 made ―persons employed in administrative, executive, or

professional capacities‖ exempt from overtime compensation requirements. (Wage Order

2

4-1998, subd. 1(A).) Wage Order 4-1998 did not articulate the precise scope of the

administrative exemption. It did, however, limit the exemption to employees ―engaged in

work which is primarily intellectual, managerial, or creative, and which requires exercise

1

The Commission initially replaced Wage Order 4-1998 with Wage Order No. 4-

2000, which took effect on October 1, 2000, and applies to claims arising on or after that

date. It then replaced Wage Order No. 4-2000 with Wage Order 4-2001, which was

effective on January 1, 2001.

The Court of Appeal concluded that ―there are no relevant differences between

Wage Order 4-2000 and Wage Order 4-2001 for our purposes‖ and thus considered them

together. We conclude likewise. For the purposes of this matter, we consider Wage

Order 4-2001 as applying after October 1, 2000.

2

Wage Order 4-1998 provided as relevant:

―1. Applicability of Order. This Order shall apply to all persons employed in

professional, technical, clerical, mechanical, and similar occupations whether paid on a

time, piece rate, commission, or other basis, unless such occupation is performed in an

industry covered by an industry order of this Commission, except that:

―(A) Provisions of Sections 3 through 12 [governing, e.g., hours and days

of work, minimum wages and rest periods] shall not apply to persons employed in

administrative, executive, or professional capacities. No person shall be considered to be

employed in an administrative, executive, or professional capacity unless one of the

following conditions prevails:

―(1) The employee is engaged in work which is primarily

intellectual, managerial, or creative, and which requires exercise of discretion and

independent judgment, and for which the remuneration is not less than $1150.00 per

month; or

―(2) The employee is licensed or certified by the State of

California and is engaged in the practice of [a profession such as law or medicine].‖

4

of discretion and independent judgment, and for which the remuneration is not less than

$1150.00 per month.‖ (Wage Order 4-1998, subd. 1(A)(1).)

The practical effect of Wage Order 4-1998, and other orders issued by the IWC

during that year, was that about eight million workers lost their right to overtime pay

because the orders ―deleted the requirement to pay premium wages after eight hours of

work a day.‖ (Stats. 1999, ch. 134, § 2, subd. (f), p. 1820, enacting Assem. Bill No. 60

(1999-2000 Reg. Sess.).) In response, the Legislature passed the ―Eight-Hour-Day

Restoration and Workplace Flexibility Act of 1999.‖ (Stats. 1999, ch. 134, § 1, p. 1820,

adding and amending provisions of Lab. Code, § 500 et seq.) The act amended Labor

Code section 510, which provides that a California employee is entitled to overtime pay

for work in excess of eight hours in one workday or 40 hours in one week. (Lab. Code, §

510, subd. (a).) However, Labor Code section 515, subdivision (a), added by the act,

exempts from overtime compensation ―executive, administrative, and professional

3

employees‖ whose primary duties ―meet the test of the exemption,‖ who ―regularly

exercise[] discretion and independent judgment in performing those duties‖ and who earn

a monthly salary at least twice the state minimum wage for full-time employees. (Ibid.)

Under the statute then, to qualify as ―administrative,‖ employees must (1) be paid at

a certain level, (2) their work must be administrative, (3) their primary duties must

involve that administrative work, and (4) they must discharge those primary duties by

regularly exercising independent judgment and discretion. The narrow question here

involves the second point, whether plaintiffs‘ work is administrative. That is, whether it

meets the test of the exemption. These statutory standards are further understood in light

of the applicable wage order.

3

Wage Order 4-1998 and Wage Order 4-2001 define ―primarily‖ as ―more than

one-half of the employee‘s work time.‖ (Regs., § 11040, subd. 2(N).) Thus, in order to

be covered by the administrative exemption under either order, employees must spend

over one-half of their work time doing work that fits the test of the exemption.

5

Labor Code section 515, subdivision (a) directs the IWC to conduct a review of the

duties that meet the test of the exemption and, if necessary, modify the regulations. After

4

review, the Commission issued Wage Order 4-2001.

4

In pertinent part, Wage Order 4-2001 provides:

―1. Applicability of Order. This order shall apply to all persons employed in

professional, technical, clerical, mechanical, and similar occupations whether paid on a

time, piece rate, commission, or other basis, except that:

―(A) Provisions of sections 3 through 12 [governing, e.g., hours and days of

work, minimum wages and rest periods] shall not apply to persons employed in

administrative, executive, or professional capacities. The following requirements shall

apply in determining whether an employee‘s duties meet the test to qualify for an

exemption from those sections:

―(1) Executive Exemption. . . [¶] . . . [¶]

―(2) Administrative Exemption. A person employed in an administrative

capacity means any employee:

―(a) Whose duties and responsibilities involve either:

―(i) The 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 customers; or

―(ii) The performance of functions in the administration of a school

system . . . ; and

―(b) Who customarily and regularly exercises discretion and independent

judgment; and

―(c) Who regularly and directly assists a proprietor, or an employee

employed in a bona fide executive or administrative capacity (as such terms are defined

for purposes of this section); or

―(d) Who performs under only general supervision work along

specialized or technical lines requiring special training, experience, or knowledge; or

―(e) Who executes under only general supervision special assignments

and tasks; and

―(f) Who is primarily engaged in duties that meet the test of the

exemption. The activities constituting exempt work and non-exempt work shall be

construed in the same manner as such terms are construed in the following regulations

under the Fair Labor Standards Act effective as of the date of this order: 29 C.F.R.

Sections 541.201-205, 541.207-208, 541.210, and 541.215. Exempt work shall include,

6

A comparison of Wage Order 4-1998 and Wage Order 4-2001 reveals that the latter

contains a much more specific and detailed description of work that is properly described

as administrative. Whereas Wage Order 4-1998 contains only a single sentence relative

to an employee involved in administrative work, Wage Order 4-2001 discusses the scope

of the administrative exemption in seven fairly extensive and interrelated subdivisions.

(Compare Wage Order 4-1998, subd. 1(A)(1) with Wage Order 4-2001, subd. 1(A)(2)(a)-

(g).) Specifically, Wage Order 4-2001, subdivision 1(A)(2)(f) provides that the terms

―exempt‖ and ―non-exempt‖ are to be construed under certain incorporated regulations

listed in the federal Fair Labor Standards Act then in effect. So, just as the statute is

understood in light of the wage order, the wage order is construed in light of the

incorporated federal regulations.

The precise question here is whether plaintiffs‘ work as claims adjusters is

encompassed by the expanded language of the statute, wage orders, and federal

regulations that delineate what work qualifies as administrative.

The Administrative Exemption

As part of its function, the IWC issues ―Statements As To The Basis‖ (hereafter,

Statement or Commission Statement) explaining ―how and why the commission did what

it did.‖ (California Hotel & Motel Assn. v. Industrial Welfare Com. (1979) 25 Cal.3d

200, 213.) With respect to Wage Order 4-2001, the Commission Statement notes, ―The

IWC intends the regulations in these wage orders to provide clarity regarding the federal

for example, all work that is directly and closely related to exempt work and work which

is properly viewed as a means for carrying out exempt functions. The work actually

performed by the employee during the course of the workweek must, first and foremost,

be examined and the amount of time the employee spends on such work, together with

the employer‘s realistic expectations and the realistic requirements of the job, shall be

considered in determining whether the employee satisfies this requirement.

―(g) Such employee must also earn a monthly salary equivalent to no less

than two . . . times the state minimum wage for full-time employment. . . .‖ (Regs.,

§ 11040.)

7

regulations that can be used [to] describe the duties that meet the test of the exemption

under California law, as well as to promote uniformity of enforcement. The IWC deems

only those federal regulations specifically cited in its wage orders, and in effect at the

time of promulgation of these wage orders, to apply in defining exempt duties under

California law.‖ (Italics added.)

Accordingly, Wage Order 4-2001 specifically directs that whether work is exempt

or nonexempt ―shall be construed in the same manner as such terms are construed in the

following regulations under the Fair Labor Standards Act effective as of the date of this

5

order: 29 C.F.R. Sections 541.201-205, 541.207-208, 541.210, and 541.215.‖ (Wage

Order 4-2001, subd. 1(A)(2)(f).)

Like its predecessor, Wage Order 4-2001 exempts ―persons employed in

administrative, executive, or professional capacities.‖ (Wage Order 4-2001, subd. 1(A).)

Unlike its predecessor, subdivision 1(A)(2) of the new wage order describes the

administrative exemption in some detail. It provides, in part, that persons are employed

in an administrative capacity if their duties and responsibilities involve office or

nonmanual work ―directly related to management policies or general business operations

of [their] employer or [the] employer‘s customers.‖ (Wage Order 4-2001, subd.

1(A)(2)(a)(i), italics added.)

Federal Regulations former part 541.205 (2000) is one of the regulations

6

incorporated in Wage Order 4-2001, subdivision 1(A)(2)(f). That regulation defined the

5

Regulations appearing in title 29 of the Code of Federal Regulations are hereafter

referred to as ― Federal Regulations.‖ Citations to the Federal Regulations are as they

existed on January 1, 2001, the effective date of Wage Order 4-2001. (Current

regulations are found in Fed. Regs. § 541.203 (2011).)

6

Federal Regulations former part 541.205 described when a claims adjuster‘s work

is ― ‗directly related to management policies or general business operations.‘ ‖ In

pertinent part it provided:

―(a) The phrase ‗directly related to management policies or general business

operations of his employer or his employer‘s customers‘ describes those types of

8

activities relating to the administrative operations of a business as distinguished from

‗production‘ or, in a retail or service establishment, ‗sales‘ work. In addition to

describing the types of activities, the phrase limits the exemption to persons who perform

work of substantial importance to the management or operation of the business of his

employer or his employer‘s customers.

―(b) The administrative operations of the business include the work performed

by so-called white-collar employees engaged in ‗servicing‘ a business as, for example,

advising the management, planning, negotiating, representing the company, purchasing,

promoting sales, and business research and control. An employee performing such work

is engaged in activities relating to the administrative operations of the business

notwithstanding that he is employed as an administrative assistant to an executive in the

production department of the business.

―(c) As used to describe work of substantial importance to the management or

operation of the business, the phrase ‗directly related to management policies or general

business operations‘ is not limited to persons who participate in the formulation of

management policies or in the operation of the business as a whole. Employees whose

work is ‗directly related‘ to management policies or to general business operations

include those [whose] work affects policy or whose responsibility it is to execute or carry

it out. The phrase also includes a wide variety of persons who either carry out major

assignments in conducting the operations of the business, or whose work affects business

operations to a substantial degree, even though their assignments are tasks related to the

operation of a particular segment of the business.

―(1) It is not possible to lay down specific rules that will indicate the

precise point at which work becomes of substantial importance to the management or

operation of a business. It should be clear that the cashier of a bank performs work at a

responsible level and may therefore be said to be performing work directly related to

management policies or general business operations. On the other hand, the bank teller

does not. Likewise it is clear that bookkeepers, secretaries, and clerks of various kinds

hold the run-of-the-[mill] positions in any ordinary business and are not performing work

directly related to management policies or general business operations. On the other

hand, a tax consultant employed either by an individual company or by a firm of

consultants is ordinarily doing work of substantial importance to the management or

operation of a business.

―(2) An employee performing routine clerical duties obviously is not

performing work of substantial importance to the management or operation of the

business even though he may exercise some measure of discretion and judgment as to the

manner in which he performs his clerical tasks. . . .

―(3) Some firms employ persons whom they describe as ‗statisticians.‘ If

all such a person does, in effect, is to tabulate data, he is clearly not exempt. However, if

such an employee makes analyses of data and draws conclusions which are important to

9

italicized phrase above. It is this ―directly related‖ phrase that distinguishes between

―administrative operations‖ and ―production‖ or ―sales‖ work. (Fed. Regs. § 541.205(a)

(2000).)

Parsing the language of the regulation reveals that work qualifies as

―administrative‖ when it is ―directly related‖ to management policies or general business

operations. Work qualifies as ―directly related‖ if it satisfies two components. First, it

must be qualitatively administrative. Second, quantitatively, it must be of substantial

importance to the management or operations of the business. Both components must be

satisfied before work can be considered ―directly related‖ to management policies or

general business operations in order to meet the test of the exemption. (Fed. Regs. §

541.205(a) (2000).)

the determination of, or which, in fact, determine financial, merchandising, or other

policy, clearly he is doing work directly related to management policies or general

business operations. . . .

―(4) Another example of an employee whose work may be important to

the welfare of the business is a buyer of a particular article or equipment in an industrial

plant or personnel commonly called assistant buyers in retail or service

establishments. . . .

―(5) The test of ‗directly related to management policies or general

business operations‘ is also met by many persons employed as advisory specialists and

consultants of various kinds, credit managers, safety directors, claim agents and adjusters,

wage-rate analysts, tax experts, account executives of advertising agencies, customers‘

brokers in stock exchange firms, promotion men, and many others.

―(6) It should be noted in this connection that an employer‘s volume of

activities may make it necessary to employ a number of employees in some of these

categories. The fact that there are a number of other employees of the same employer

carrying out assignments of the same relative importance or performing identical work

does not affect the determination of whether they meet this test so long as the work of

each such employee is of substantial importance to the management or operation of the

business.‖ (Fed. Regs. § 541.205(a)-(c) (2000).)

10

The regulation goes on to further explicate both components. Federal Regulations

former part 541.205(b) discusses the qualitative requirement that the work must be

administrative in nature. It explains that administrative operations include work done by

―white collar‖ employees engaged in servicing a business. Such servicing may include,

as potentially relevant here, advising management, planning, negotiating, and

representing the company. Federal Regulations former part 541.205(c) relates to the

quantitative component that tests whether work is of ―substantial importance‖ to

management policy or general business operations.

Read together, the applicable Labor Code statutes, wage orders, and incorporated

federal regulations now provide an explicit and extensive framework for analyzing the

administrative exemption.

Trial Court and Court of Appeal Decisions

As noted, plaintiffs moved for summary adjudication of defendants‘ affirmative

defense that plaintiffs were exempt from overtime compensation requirements. The

motion challenged whether plaintiffs‘ work met the test of the administrative exemption.

Defendants opposed the motion and moved to decertify the class. A summary

adjudication motion must completely dispose of the affirmative defense to which it is

directed. (Code Civ. Proc., § 437c, subd. (f)(1); North Coast Women’s Care Medical

Group, Inc. v. Superior Court (2008) 44 Cal.4th 1145, 1160; Hood v. Superior Court

(1995) 33 Cal.App.4th 319, 322-323.)

As explained, the test for the one element of the administrative exemption at issue

here, the character of plaintiffs‘ duties, has both a qualitative and a quantitative

component. Because the test is conjunctive, plaintiffs need only show that defendants

cannot meet their burden as to either part of the test in order to succeed on their motion

for summary adjudication. (See Ramirez v. Yosemite Water Co. (1999) 20 Cal.4th 785,

794-795.) Here, plaintiffs attacked defendants‘ showing as to the qualitative component,

i.e, whether the work was administrative in nature. We limit our further discussion to

11

that question. We express no opinion as to whether the record reveals a triable issue on

the quantitative component of the test.

To argue that the test of the administrative exemption could not be met, plaintiffs

placed great emphasis on the so-called administrative/production worker dichotomy.

This dichotomy was applied by the court in the Bell cases. As we explain, the Court of

Appeal majority‘s overreliance on the Bell cases created much of the confusion here. In

order to understand why this is so, some discussion of both the administrative/production

worker dichotomy and the court‘s reliance on it in the Bell cases is necessary.

In basic terms, the administrative/production worker dichotomy distinguishes

between administrative employees who are primarily engaged in ― ‗administering the

business affairs of the enterprise‘ ‖ and production-level employees whose ― ‗primary

duty is producing the commodity or commodities, whether goods or services, that the

enterprise exists to produce and market. [Citation.]‘ ‖ (Bell II, supra, 87 Cal.App.4th at

p. 821.) Plaintiffs here contended that this concept was the touchstone for deciding

whether they fell under the administrative exemption.

As discussed, the trial court decertified the class in part, depending on whether

plaintiffs‘ claims arose before or after October 1, 2000, the date the IWC amended Wage

Order 4-1998. The trial court felt bound by the Bell cases, which interpreted Wage Order

4-1998. In doing so, the Bell cases held that, under the provisions of Wage Order 4-1998,

claims adjusters were nonexempt ―production workers.‖ (See Bell II, supra, 87

Cal.App.4th at p. 826.) The trial court here decertified the class as to all claims arising

after October 1, 2000, when Wage Order No. 4-2000 became effective. (See ante, fn. 1.)

The Bell cases had no occasion to consider Wage Order 4-2001. We examine the Bell

cases in some detail because the Court of Appeal relied so heavily upon them in

construing Wage Order 4-2001.

The Bell litigation involved a class action suit based on an allegation that the

plaintiffs were denied overtime compensation. (Bell II, supra, 87 Cal.App.4th at p. 808.)

12

The plaintiffs were insurance claims representatives employed in a number of branch

offices of Farmers Insurance Exchange (FIE). There was extensive information in the

record about the nature of the plaintiffs‘ work and the way the business was structured.

In the first Bell case, the defendants sought review of the class certification order.

That matter was dismissed on procedural grounds. (See Bell III, supra, 115 Cal.App.4th

at p. 720.)

Bell II arose after the grant of summary adjudication in which the trial court

determined that the claims representatives were not ―administrators‖ and thus the

administrative exemption contained in Wage Order 4-1998 was not applicable to the

plaintiffs. (Bell II, supra, 87 Cal.App.4th at pp. 808-809.) That ruling was affirmed. (Id.

at p. 821.)

Bell III was an appeal taken after a jury trial. As part of that appeal the defendants

urged the court to reconsider its holding in Bell II in light of ― ‗[r]ecent developments in

federal law.‘ ‖ (Bell III, supra, 115 Cal.App.4th at p. 727.) While concluding that actual

reconsideration was precluded by the law of the case doctrine, the Bell III court addressed

the defendants‘ criticism of Bell II at length. (Bell III, at pp. 727-739.) As a result, the

Bell III court provided a judicial gloss to its earlier opinion in Bell II.

Bell II considered Wage Order 4–1998, subdivision 1(A) which directs that the

overtime regulations shall not apply to those working in ―administrative, executive, or

professional capacities.‖ Subdivision 1(A)(1) provided that no person may be considered

to work in one of those capacities unless the work done ―is primarily intellectual,

managerial, or creative, . . . requires exercise of discretion and independent judgment,‖

and is compensated at a given rate. As noted, the wage order itself did not provide any

―independent meaning‖ for the term ―administrative capacities.‖ (Bell II, supra, 87

Cal.App.4th at p. 811.)

13

FIE argued that the scope of the administrative exemption, as it related to those

7

plaintiffs, was defined exclusively by Wage Order 4-1998, subdivision 1(A)(1) and (2).

In rejecting this argument the court noted that the description of qualifying duties was

―very brief‖ and could not ―reasonably be considered . . . an adequate definition of the

phrase ‗administrative, executive, or professional capacities.‘ ‖ (Bell II, supra, 87

Cal.App.4th at p. 811.)

In part, because of the brevity of treatment, the Bell II court concluded that it was

reasonable to give the term ―administrative capacity‖ an independent meaning beyond,

and unlimited by, the description contained in Wage Order 4-1998, subdivision 1(A)(1).

Thus, the court considered the term ―administrative capacity‖ to describe the role of an

employee in the business enterprise. It distinguished between that role and the duties of

an employee as generally set out in subdivision 1(A)(1)—i.e., work that is ―primarily

intellectual, managerial, or creative, and which requires exercise of discretion and

independent judgment.‖ (See Bell II, supra, 87 Cal.App.4th at pp. 819-820.)

It is apparent that many of the same concepts now set out in Labor Code section

515, Wage Order 4-2001, and the incorporated federal regulations were also at play in

Bell II. However, under the new statute and wage order, the way in which those concepts

interrelate has been substantially clarified. The Bell II court did not have the benefit of

these clarifications. As a result, the Bell II court was challenged to reach beyond the

language of the enactments to resolve the thorny issue before it.

In essence, Bell II treated the analysis as a two-pronged inquiry, the first prong

going to role and the second to duties. (See Bell III, supra, 115 Cal.App.4th at p. 736.) It

7

Wage Order 4-1998, subdivision 1(A)(2) related to the professional aspect of the

exemption and covered those practicing a profession like law or medicine. That

subdivision obviously was not implicated in the Bell cases.

14

was in deducing the role denoted by the term ―administrative capacity‖ that the Bell II

court turned to the administrative/production worker dichotomy. (Bell III, at p. 729.)

The Bell II court found the dichotomy a useful tool based on the state of the record

before it and the wording of Wage Order 4-1998. Even so, the court noted that the

dichotomy offers only a ―broad distinction demanding further refinement in some cases.‖

(Bell II, supra, 87 Cal.App.4th at p. 820.)

In reaching its conclusion, the Bell II court relied on the following undisputed facts.

FIE did not sell insurance. It did, however, perform substantial claims-handling work for

other related companies within the Farmers Insurance Group of Companies and was

reimbursed for the cost of those services. FIE performed a specialized function within

the broader corporate structure of the Farmers Insurance Group of Companies. As a

result of the corporate structure, FIE was managed by another company, Farmers Group,

Inc. Farmers Group, Inc., performed a large number of what would normally be

considered administrative activities, including auditing, legal counseling, underwriting,

and other matters not directly related to claims. Claims representatives had no formal

advisory role in setting FIE‘s claims-handling policy. (Bell II, supra, 87 Cal.App.4th at

pp. 823-824.)

The Bell II court concluded that, on its record, there were no triable issues of

material fact supporting any conclusion other than that FIE‘s business was to handle

claims. As a result, the adjusters fell squarely on the production side of the

administrative/production worker dichotomy. (Bell II, supra, 87 Cal.App.4th at p. 826.)

The Bell II court went on to decide whether that conclusion supported a grant of

summary adjudication. It acknowledged that the question was a complex one. It

explicitly recognized the limitations of the dichotomy were it to be applied in other

contexts: ―the administrative/production worker dichotomy is a somewhat gross

distortion that may not be dispositive in many cases.‖ (Bell II, supra, 87 Cal.App.4th at

p. 826.) Further, ―some employees perform specialized functions within [a] business

15

organization that cannot readily be characterized in terms of the . . . dichotomy.‖ (Ibid.)

―Other employees perform jobs involving wide variations in responsibility that may call

for finer distinctions than the . . . dichotomy provides.‖ (Id. at p. 827.) It went on to note

that claims adjusting illustrates the kind of work that may call for such a finer distinction,

because a great variety of employees may be covered by such a job title. Some adjusters

may do fairly routine work, while others may have expansive authority and their

decisions may have substantial importance to the business of their employers. (Ibid.)

The Bell II court warned that in the absence of ―detailed interpretative regulations‖

such as those at play in the federal cases, ―California courts must use great caution in

granting summary judgment or summary adjudication on the basis of such a broad

distinction as the administrative/production worker dichotomy.‖ (Bell II, supra, 87

Cal.App.4th at p. 827.)

The Bell II court concluded that summary adjudication was appropriate in light of

its particular record. It noted that FIE had deliberately decided to structure its operations

in a given manner. (Bell II, supra, 87 Cal.App.4th at p. 827.) The effect of that decision

was to render the work of its claims representatives ―routine and unimportant‖ in terms of

its business impact, as the plaintiffs were merely producers of the product sold by the

defendants. The settlement authority of claims representatives was set at a low level. (Id.

at p. 828.) Conversely, when a decision involved ―matters of greater importance‖ it was

made by a supervisor, with the adjusters functioning merely as ―investigators‖ or

―conduits of information.‖ (Ibid.) Because the FIE adjusters‘ role in the business was

―routine and unimportant‖ they could not be considered administrative workers. (Ibid.)

Because the adjusters were not administrative workers due to their role, defendants

could not satisfy the first prong of Bell II‘s two-part test. As a result, the Bell II court

concluded that it need not consider whether the plaintiffs‘ duties fell under the

description set out in Wage Order 4–1998, subdivision 1(A)(1) of those whose work was

―primarily intellectual, managerial, or creative,‖ and ―require[d] the exercise of discretion

16

and independent judgment.‖ The court was careful to point out that its separate

determination as to the plaintiffs‘ role in FIE‘s business disposed of that case but

recognized that in other cases careful analysis of employees‘ duties might be necessary to

determine whether their status was exempt or not. (Bell II, supra, 87 Cal.App.4th at p.

829.) As the Bell III court noted, ―our opinion in Bell II was based on the restricted

record before us and cannot be read out of that context.‖ (Bell III, supra, 115 Cal.App.4th

at p. 730.)

The Bell cases are distinguishable from this case in two important ways. First, those

opinions carefully limited their holdings to their facts, including the defendants‘

stipulation that the work performed by all plaintiffs was ―routine and unimportant.‖ In

light of the stipulation, there was no dispute that the plaintiffs‘ work placed them on the

production side of the administrative/production worker dichotomy. (Bell II, supra, 87

Cal.App.4th at p. 826.) In so concluding, the Bell II court effectively conflated the

qualitative and quantitative aspects of the ―directly related‖ test now set out in Wage

Order 4-2001 and amplified in Federal Regulations former part 541.205(a), (b), and (c).

(See ante, at pp. 7-11.)

Second, because Wage Order 4-1998 did not provide sufficient guidance, the Bell II

court looked beyond the language of the wage order and employed the

administrative/production worker dichotomy as an analytical tool. The whole approach

in Bell II rested on the conclusion that Wage Order 4-1998 failed to provide a sufficient

explanation of the extent of the administrative exemption. (Combs v. Skyriver

Communications (2008) 159 Cal.App.4th 1242, 1260 (Combs).) By comparison, Wage

Order 4-2001, the operative order here, along with the incorporated federal regulations,

set out detailed guidance on the question.

In concluding that plaintiffs were not exempt administrative employees, the Court of

Appeal majority placed substantial reliance on the Bell cases. It was unpersuaded by

defendants‘ argument that Bell II is distinguishable because there FIE had conceded that

17

its claims adjusters‘ duties were ―routine and unimportant.‖ (Bell II, supra, 87

Cal.App.4th at p. 828.) The majority here stated, ―We agree that defendants have

introduced substantial evidence that plaintiffs‘ work is not routine and unimportant, and

that Bell II is distinguishable on that ground. But the fact remains that plaintiffs‘ work —

investigating claims, determining coverage, setting reserves, etc. — is not carried on at

the level of policy or general operations, so it falls on the production side of the

dichotomy. Not all production work is routine or unimportant.‖

The Court of Appeal majority was correct in noting that Bell II is distinguishable. It

erred when it relied on distinguishable authority to create a rigid rule, an outcome even

the Bell cases cautioned against. The majority below did acknowledge new Wage Order

4-2001 and some of the applicable federal regulations. It did not, however, consider all

of the relevant aspects of Federal Regulations former part 541.205, specifically subpart

(b). Instead, it reached out for support to other federal regulations not incorporated in

Wage Order 4-2001.

The majority below focused on Federal Regulations former part 541.205(a),

concluding that ―only work performed at the level of policy or general operations can

qualify as ‗directly related to management policies or general business operations.‘ In

contrast, work that merely carries out the particular day-to-day operations of the business

is production, not administrative, work. That is the administrative/production worker

dichotomy, properly understood. [Fn. omitted.]‖

The majority below provided its own gloss to the administrative/production worker

dichotomy and used it, rather than applying the language of the relevant wage order and

regulations. Such an approach fails to recognize that the dichotomy is a judicially created

creature of the common law which has been effectively superseded in this context by the

more specific and detailed statutory and regulatory enactments.

While it bolstered its conclusion by citing Federal Regulations former part

541.205(a), the majority failed to adequately consider other subparts of that regulation.

18

Such an approach violates the long-standing rule of construction that an enactment is to

be read as a whole and that interpretations are to be avoided if they render part of an

enactment nugatory. (Lungren v. Deukmejian (1988) 45 Cal.3d 727, 735; McLaughlin v.

State Bd. of Education (1999) 75 Cal.App.4th 196, 211.)

As discussed above (see ante, at pp. 8-11), Federal Regulations former part

541.205(a), (b), and (c) must be read together in order to apply the ―directly related‖ test

and properly determine whether the work at issue satisfies the administrative exemption.

For example, former part 541.205(b) supplied a general description of the types of duties

that constitute ―administrative operations of the business.‖ It included work performed

by ―white-collar employees engaged in ‗servicing‘ a business as, for example, advising

the management, planning, negotiating, [and] representing the company.‖ The dissent

below argued, ―That is what claims adjusters do—they negotiate settlements (and

conclude some without seeking approval), advise management, and process claims.‖ The

incorporation of former part 541.205(b) shows that whether work is part of the

―administrative operations‖ of a business depends, in part, on whether it involves

advising management, planning, negotiating, and representing the company. It is not so

narrowly limited as the majority below declared.

The Court of Appeal also cited Bratt v. County of Los Angeles (9th Cir. 1990) 912

F.2d 1066 (Bratt) in support of its holding. Bratt held that under the federal Fair Labor

Standards Act, the administrative exemption does not apply to probation officers, stating,

―[T]he test is whether the activities are directly related to management policies or general

business operations. . . . [¶] . . . [W]hile the regulations provide that ‗servicing‘ a business

may be administrative, . . . § 541.205(b), ‗advising the management‘ as used in that

subsection is directed at advice on matters that involve policy determinations, i.e., how a

business should be run or run more efficiently, not merely providing information in the

course of the customer‘s daily business operation.‖ (Bratt, at p. 1070.)

19

Applying Bratt to this case, the majority below reasoned that ―although advising

management about the formulation of policy is exempt administrative work, advising

management about the settlement of an individual claim is not.‖ The majority held that

plaintiffs‘ duties here are ―not carried on at the level of policy or general operations.‖

Bratt‘s persuasiveness is in doubt. The Ninth Circuit has subsequently held that

under more recent applicable federal regulations, claims adjusters are exempt from the

Fair Labor Standards Act‘s overtime requirements ―if they perform activities such as

interviewing witnesses, making recommendations regarding coverage and value of

claims, determining fault and negotiating settlements.‖ (Miller v. Farmers Ins. Exch. (In

8

Re Farmers Ins. Exch.) (9th Cir. 2007) 481 F.3d 1119, 1124.) In addition, Bratt

involved probation officers, not claims adjusters. The Bratt court concluded that the

probation officers were more like inspectors who merely supply information:

―[A]lthough probation officers provide recommendations to the courts, these

recommendations do not involve advice on the proper way to conduct the business of the

court, but merely provide information which the court uses in the course of its daily

production activities.‖ (Bratt, supra, 912 F.2d at p. 1070.)

The analysis in Bratt highlights the difficulty in relying on the particular role of

employees in one enterprise to deduce a rule applicable to another kind of business. It

also reveals the limitations of the administrative/production worker dichotomy itself as an

8

We note that many federal courts are in accord with this conclusion. (See Smith v.

Government Employees Ins. Co. (D.C. Cir. 2010) 590 F.3d 886, 897; Roe-Midgett v. CC

Services, Inc. (7th Cir. 2008) 512 F.3d 865, 875; Cheatham v. Allstate Ins. Co. (5th Cir.

2006) 465 F.3d 578, 585-586; McAllister v. Transamerica Occidental Life Ins. Co. (8th

Cir. 2003) 325 F.3d 997, 998, 1001; Jastremski v. Safeco Ins. Companies (N.D. Ohio

2003) 243 F.Supp.2d 743, 753; Palacio v. Progressive Ins. Co. (C.D.Cal. 2002) 244

F.Supp.2d 1040, 1045, 1047.) These cases are instructive because the regulations

enacted by the United States Department of Labor after Wage Order 4-2001 were

intended to be consistent with the old regulations. (See, e.g., Miller v. Farmers Ins. Exch.

(In Re Farmers Ins. Exch.), supra, 481 F.3d at pp. 1128-1129.)

20

analytical tool. As the dissent below points out, ―[B]ecause the dichotomy suggests a

distinction between the administration of a business on the one hand, and the ‗production‘

end on the other, courts often strain to fit the operations of modern-day post-industrial

service-oriented businesses into the analytical framework formulated in the industrial

climate of the late 1940‘s.‖

The Court of Appeal majority also sought to bolster its conclusion by observing:

―[U]nder the [federal Fair Labor Standards Act], employees whose duties ‗necessitate

irregular hours of work‘ may enter contracts with their employers guaranteeing constant

pay for varying workweeks that might otherwise violate the maximum hour requirements

of the statute. [Citation.]‖ It then referred to Federal Regulations part 778.405, which

lists ―insurance adjusters‖ as employees who are eligible to enter into the varying

workweek contracts permitted by the Fair Labor Standards Act. The majority reasoned

that, by implication, plaintiffs are nonexempt employees, ―otherwise, the provision

concerning varying-workweek contracts would have nothing to do with them.‖ The

implication is unwarranted. The IWC Statement issued in connection with Wage Order

4-2001 clearly states that “only those federal regulations specifically cited in its wage

orders, and in effect at the time of promulgation‖ shall be applied in defining exempt

duties under California law. (Italics added.) Federal Regulations part 778.405 is not

listed, and was thus not incorporated by the IWC for the purposes of construing the wage

order.

Defendants also argue that the Court of Appeal improperly relied on opinion letters

issued in 1998 and 2003 by the Division of Labor Standards Enforcement (DLSE), the

state agency that enforces IWC orders. Although we generally give DLSE opinion letters

―consideration and respect,‖ it is ultimately the judiciary‘s role to construe the language.

(Compare Murphy v. Kenneth Cole Productions, Inc. (2007) 40 Cal.4th 1094, 1105, fn. 7

with Tidewater Marine Western, Inc. v. Bradshaw (1996) 14 Cal.4th 557, 576.) The

1998 letter applies the administrative/production worker dichotomy and concludes that

21

claims adjusters described by the Bell plaintiffs‘ attorneys were not exempt. The 2003

letter states that the Bell II analysis of the dichotomy is still viable after the IWC‘s

adoption of Wage Order 4-2001. Our decision is not inconsistent with these letters. We

do not hold that the administrative/production worker dichotomy was misapplied to the

Bell II plaintiffs, based on the record in that case, or that the dichotomy can never be used

as an analytical tool. We merely hold that the Court of Appeal improperly applied the

administrative/production worker dichotomy as a dispositive test.

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. Only if those sources fail to provide

adequate guidance, as was the case in Bell II, is it appropriate to reach out to other

sources.

We express no opinion on the strength of the parties‘ relative positions. We merely

9

hold that the Court of Appeal majority erred in its analysis.

9

Defendants contend that if the Court of Appeal erred, this court should decertify

the class in its entirety. In light of our limited ruling, we decline to decertify the class.

However, defendants are free to raise the issue on remand.

22

DISPOSITION

We reverse the judgment of the Court of Appeal and remand with directions that it

review the trial court‘s denial of the summary adjudication motion, applying the

appropriate legal standard set out herein.

CORRIGAN, J.

WE CONCUR:

CANTIL-SAKAUYE, C. J.

KENNARD, J.

BAXTER, J.

WERDEGAR, J.

CHIN, J.

LIU, J.

23

See last page for addresses and telephone numbers for counsel who argued in Supreme Court.

Name of Opinion Harris et al. v. Superior Court

__________________________________________________________________________________

Unpublished Opinion

Original Appeal

Original Proceeding

Review Granted

Rehearing Granted XXX 154 Cal.App.4th 164

__________________________________________________________________________________

Opinion No. S156555

Date Filed: December 29, 2011

__________________________________________________________________________________

Court: Superior

County: Los Angeles

Judge: Carolyn B. Kuhl

__________________________________________________________________________________

Counsel:

Lerach Coughlin Stoia Geller Rudman & Robbins, Coughlin Stoia Gellar Rudman & Robbins, Patrick J. Coughlin,

Theodore J. Pintar, Steven W. Pepich, Kevin K. Green, Steven M. Jodlowski; Cohelan & Khoury, Cohelan Khoury

& Singer, Timothy D. Cohelan, Isam C. Khoury, Michael D. Singer; Spiro, Moss, Barness & Harrison, Spiro Moss

Barness, Dennis F. Moss, Ira Spiro; Law Offices of Michael I. Carver and Michael I. Carver for Petitioners and Real

Parties in Interest Frances Harris, Dwayne Garner, Marion Brenish-Smith, Steven Brickman, Kelly Gray, Adell

Butler-Mitchell and Lisa McCauley.

Arbogast & Berns and David M. Arbogast for Consumer Attorneys of California as Amicus Curiae on behalf of

Petitioners and Real Parties in Interest Frances Harris, Dwayne Garner, Marion Brenish-Smith, Steven Brickman,

Kelly Gray, Adell Butler-Mitchell and Lisa McCauley.

Hud Collins as Amicus Curiae on behalf of Petitioners and Real Parties in Interest Frances Harris, Dwayne Garner,

Marion Brenish-Smith, Steven Brickman, Kelly Gray, Adell Butler-Mitchell and Lisa McCauley.

Rudy, Exelrod & Zieff, Rudy, Exelrod, Zieff & Lowe and Kenneth J. Sugarman for California Employment

Lawyers Association as Amicus Curiae on behalf of Petitioners and Real Parties in Interest Frances Harris, Dwayne

Garner, Marion Brenish-Smith, Steven Brickman, Kelly Gray, Adell Butler-Mitchell and Lisa McCauley.

Sidley Austin, Douglas R. Hart, Geoffrey D. Deboskey; Sheppard Mullin Richter & Hampton, Robert J. Stumpf,

William V. Whelan and Karin Dougan Vogel for Petitioners and Real Parties in Interest Liberty Mutual Insurance

Company and Golden Eagle Insurance Corporation.

Leland Chan for California Bankers Association as Amicus Curiae on behalf of Petitioners and Real Parties in

Interest Liberty Mutual Insurance Company and Golden Eagle Insurance Corporation.

Winston & Strawn, Lee T. Paterson and Audrey Shen Chui for Employers Group as Amicus Curiae on behalf of

Petitioners and Real Parties in Interest Liberty Mutual Insurance Company and Golden Eagle Insurance Corporation.

Page 2 – S15655 – counsel continued:

Counsel:

Gregory F. Jacob, Steven J. Mandel, Paul L. Frieden and Joanna Hull for the Secretary of Labor, U.S. Department of

Labor as Amicus Curiae on behalf of Petitioners and Real Parties in Interest Liberty Mutual Insurance Company and

Golden Eagle Insurance Corporation.

Sonnenschein Nath & Rosenthal, Paul E. B. Glad, Gayle M. Athanacio and Virginia K. Young for Association of

California Insurance Companies, Personal Insurance Federation of California and Pacific Association of Domestic

Insurance Companies as Amici Curiae on behalf of Petitioners and Real Parties in Interest Liberty Mutual Insurance

Company and Golden Eagle Insurance Corporation.

National Chamber Litigation Center Inc., Robin S. Conrad; Mayer Brown and Donald M. Falk for Chamber of

Commerce of the United States of America as Amicus Curiae on behalf of Petitioners and Real Parties in Interest

Liberty Mutual Insurance Company and Golden Eagle Insurance Corporation.

Berger Kahn and Teresa R. Tracy for Progressive Casualty Insurance Company as Amicus Curiae on behalf of

Petitioners and Real Parties in Interest Liberty Mutual Insurance Company and Golden Eagle Insurance Corporation.

Bien & Summers, Elliot L. Bien and Catherine S. Meulemans for American Insurance Association as Amicus Curiae

on behalf of Petitioners and Real Parties in Interest Liberty Mutual Insurance Company and Golden Eagle Insurance

Corporation.

Seyfarth Shaw, George Preonas, Michael D. Mandel and Gilmore F. Diekmann, Jr., for California Employment Law

Council as Amicus Curiae on behalf of Petitioners and Real Parties in Interest Liberty Mutual Insurance Company

and Golden Eagle Insurance Corporation.

No appearance for Respondent.

Counsel who argued in Supreme Court (not intended for publication with opinion):

Patrick J. Coughlin

Coughlin Stoia Gellar Rudman & Robbins

655 West Broadway, Suite 1900

San Diego, CA 92101

(619) 231-1058

Douglas R. Hart

Sidley Austin

555 West Fifth Street, Suite 4000

Los Angeles, CA 90013

(213) 896-6122