Wilson v. Farmers Ins. Exchange CA2/3

Filed 5/27/16 Wilson v. Farmers Ins. Exchange CA2/3
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION THREE
AUDREY WILSON et al., B260729
Plaintiffs and Appellants, (Los Angeles County
Super. Ct. No. BC371597)
v.
FARMERS INSURANCE EXCHANGE,
Defendant and Respondent.
APPEAL from an order of the Superior Court of Los Angeles County,
John Shepard Wiley, Judge. Affirmed.
R. Rex Parris Law Firm, R. Rex Parris, Alexander R. Wheeler, Kitty Szeto, John
M. Bickford; Altshuler Berzon, Michael Rubin and Peder J. Thoreen for Plaintiffs and
Appellants.
Seyfarth Shaw, Andrew M. Paley, James M. Harris, Sheryl L. Skibbe and
Kiran Aftab Seldon for Defendant and Respondent.
_____________________
INTRODUCTION
Plaintiffs Audrey Wilson, Helene Diamond, and Connie Gilbert (Plaintiffs),
former claims adjusters for defendant Farmers Insurance Exchange (Farmers), appeal
from an order denying their motion for class certification. Plaintiffs allege that Farmers
misclassified its claims adjusters as “exempt” employees under the “administrative
exemption” to avoid paying overtime and other compensation required by the Labor
Code. In their motion for class certification, Plaintiffs argued the misclassification claim
could be resolved on a class basis because all of Farmers’s claims adjusters performed the
same primary job duties. The trial court denied the motion, finding the proposed class
and subclasses lacked the requisite community of interest.
We affirm. An employee is exempt from overtime pay under the “administrative
exemption” if, among other things, his or her job duties involve office or nonmanual
work “directly related to management policies or general business operations of his/her
employer or his employer’s customers.” (Cal. Code Regs., tit. 8, § 11040,
subd. (1)(A)(2)(a)(I), italics added.)1 To qualify as “ ‘directly related,’ ” the work must
be both “qualitatively administrative”—that is, it must be among “the types of duties that
constitute ‘administrative operations of the business’ ”—and, “quantitatively, it must be
of substantial importance to the management or operations of the business.” (Harris I,
supra, 53 Cal.4th at pp. 181, 188.) Plaintiffs assert their theory of recovery focuses
exclusively on the qualitative prong, and that common proof will establish whether every
member of the proposed class engaged in qualitatively administrative work for the entire
class period. The trial court rejected this assertion, finding the common proof Plaintiffs
proposed to present was legally insufficient to establish misclassification under the
qualitative prong and that the nature of the work actually performed by Farmers’s claims
adjusters varied widely from adjuster to adjuster such that individual issues would
predominate. The law and record support the trial court’s ruling. We affirm.
1
Title 8 of the California Code of Regulations, section 11040 is hereafter referred to
as Wage Order 4-2001. (See Harris v. Superior Court (2011) 53 Cal. 4th 170, 176-177
(Harris I).)
2
FACTS AND PROCEDURAL BACKGROUND
1. The Parties and Complaint
Farmers is a reciprocal or interinsurance exchange. It performs all the functions of
a typical insurance company, including selling policies, contracting with agents who sell
and service policies, procuring reinsurance, and adjusting claims made on its policies.
Farmers employs “claims representatives” to adjust claims made on the policies it sells.
We refer to these employees as claims adjusters.
Plaintiffs were employed as claims adjusters in Farmers’s commercial liability
group. Their operative second amended complaint alleges Farmers improperly classified
claims adjusters on its commercial liability lines as “exempt” employees. As a result of
the alleged misclassification, the complaint asserts Farmers unlawfully required claims
adjusters to work uncompensated overtime and without off-duty meal and rest periods,
while failing to provide accurate wage statements in violation of the Labor Code and
Business and Professions Code.2
2. Plaintiffs Move for Class Certification
Plaintiffs moved to certify seven subclasses, each “ ‘comprised of all persons who,
since May 18, 2003, have been employed, or are currently employed, by [Farmers] in
California as a Claims Representative in’ one of seven different departments within
Farmers ‘and who were paid as exempt employees . . . , as the same are defined pursuant
to statute and/or California or federal regulatory determination . . . .’ ” (Footnote
omitted.) Plaintiffs defined the proposed subclasses to correspond to the following seven
departments, each of which employed claims adjusters to service claims on Farmers’s
2
The complaint asserts nine causes of action for (1) failure to pay overtime
compensation in violation of Labor Code section 1194; (2) failure to provide meal
periods in violation of Labor Code section 226.7; (3) failure to provide rest periods in
violation of Labor Code section 226.7; (4) failure to provide accurate wage statements in
violation of Labor Code section 226; (5) failure to pay compensation upon
termination/resignation in violation of Labor Code sections 201 through 203;
(6) declaratory relief; (7) accounting; (8) injunctive relief; and (9) unfair business
practices in violation of Business and Professions Code section 17200 et seq.
3
various commercial policy lines: (1) Commercial Liability; (2) Commercial Property;
(3) Construction Defect; (4) Mold; (5) Workers’ Compensation; (6) National Large Loss;
and (7) Environmental.
With respect to the requisite community of interest, Plaintiffs argued the claims
adjusters “within each sub-class engage in the same core, finite duties” and that “nearly
every aspect of [these duties] requires higher-level approval, involves an automated
function, or is a routine, non-exempt job duty.” For proof, Plaintiffs relied principally
upon declarations from 16 putative class members, who stated they spent “the majority of
their time performing routine, non-exempt duties,” and deposition excerpts from several
Farmers supervisors, who testified broadly about the “core duties” that claims adjuster
within each department perform. Plaintiffs also offered evidence of “uniform policies,”
“guidelines” and “checklists,” which Farmers purportedly “used to control nearly every
aspect of the [claims adjusters’] daily duties.” Based on this evidence, Plaintiffs
maintained common questions predominated with respect to the administrative
exemption’s applicability to Farmers’s claims adjusters, in particular whether adjusters
spent “over fifty percent of their time on exempt tasks,” and whether adjusters regularly
exercised “independent judgment related to matters of significance.”
3. The Court of Appeal Issues the Harris II Opinion and Farmers Files
Opposition to Class Certification
Four days before Farmers filed its opposition to Plaintiffs’ class certification
motion, a divided Court of Appeal issued a published opinion in Harris v. Superior Court
(July 23, 2012, B1915121) (Harris II), review denied and opinion ordered not published
October 24, 2012, S205297.3 In that opinion, the majority held the administrative
3
The Court of Appeal decided Harris II after the Supreme Court reversed the
appellate court’s earlier judgment and remanded the case with directions to review the
trial court’s denial of summary judgment applying the legal standard articulated in
Harris I. (Harris I, supra, 53 Cal.4th at p. 191.) In its original judgment, the appellate
court erroneously applied the “administrative/production worker dichotomy” as a
“dispositive test” to conclude that work performed by claims adjusters did not come
within the administrative exemption articulated in Wage Order 4-2001. (Harris I, at
4
exemption did not apply to claims adjusters because their work was not qualitatively
administrative under the majority’s interpretation of Wage Order 4-2001 and the
incorporated federal regulation.4
Farmers briefly addressed Harris II in its opposition, arguing the opinion was
contrary to the Supreme Court’s directives in Harris I (see fn. 3, ante) and the weight of
other appellate authorities addressing the issue. The bulk of Farmers’s opposition,
however, focused on establishing the existence of individualized factual issues
concerning the “primarily engaged in” and “independent judgment” elements of the
administrative exemption, which had been the major focus of Plaintiffs’ initial motion.
p. 190.) “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.]’ ” (Id. at p. 183.) As applied by
earlier cases decided under former Wage Order 4-1998, work that fell on the “production
side” of the dichotomy did not qualify as administrative for purposes of the exemption.
(Id. at p. 186.) In Harris I, the Supreme Court held the appellate court’s rigid reliance on
the dichotomy failed to account for significant additions to Wage Order 4-2001—in
particular, the incorporation of regulations listed in the federal Fair Labor Standards Act
of 1938 (29 U.S.C. § 201 et seq.) that provided a detailed definition of the phrase
“ ‘directly related to management policies or general business operations.’ ” (Harris I, at
pp. 179-180, italics omitted.) In remanding the matter to the appellate court, the Supreme
Court instructed that, to resolve “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” before invoking a judicially created test to determine whether work is
qualitatively administrative. (Id. at p. 190, italics added.)
4
As we discuss in detail below, Harris I determined the “directly related”
requirement has a “qualitative” and “quantitative” component under the wage order and
incorporated federal regulation. (Harris I, supra, 53 Cal.4th at p. 181.) Harris I and
Harris II focused on the qualitative component, which concerns the “types of duties that
constitute ‘administrative operations of the business.’ ” (Harris I, at p. 188.) Under the
applicable federal regulation, “[t]he 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.” (29 C.F.R.
former § 541.205(b) (2000).)
5
Based on declarations by 14 putative class members, deposition testimony from
several other class members, and documentary evidence, Farmers sought to demonstrate
that claims adjusters’ actual duties varied substantially both across and within the various
departments. Farmers’s evidence showed that an individual claims adjuster’s duties, and
the manner in which the adjuster performed his or her duties, depended on several factors
unique to the particular adjuster, including the claims department in which the adjuster
worked, the type of investigation required for a particular claim, the level of supervision
over the adjuster, and whether the adjuster performed management duties, such as
managing litigation or supervising others within the department.
With respect to whether claims adjusters exercised independent judgment,
Farmers’s evidence showed that the “ ‘uniform’ ” guidelines referenced in Plaintiffs’
motion were only in place for certain departments during parts of the class period.
Additionally, many of Farmers’s declarants testified, contrary to Plaintiffs’ assertions,
that they looked to the guidelines only as a “tool” for determining “when things should be
escalated” to a supervisor, but not as a “step-by-step” guide to adjusting a claim. As for
supervisory control, Farmers’s evidence showed this also varied among individual
adjusters depending upon an adjuster’s experience or past performance, or upon a
supervisor’s individual management style.
4. Plaintiffs File Their Reply and the Trial Court Issues Its Initial Order
Granting Class Certification
Following Harris II, Plaintiffs recast their theory of recovery to focus exclusively
on the qualitative component of the directly related requirement. (See fn. 4, ante.) In
their reply brief, Plaintiffs argued Harris II mandated certification insofar as the appellate
opinion supplied a legal basis for finding, regardless of variations in the work performed
by individual claims adjusters, that all putative class members had been misclassified as
administratively exempt employees.
The trial court agreed that Harris II controlled. In its order initially granting
certification, the court explained: “The issue is whether insurance adjusters are exempt.
[Harris II] said no: not exempt. The wage and hour laws apply to them: meal breaks,
6
rest breaks, and all the rest. Farmers dismisses this ‘erroneous analysis’ [citation], but
this appellate law compels certification. [¶] [Harris II] held that the alleged
heterogeneity of the class was no reason to deny class certification. [Citation.] Farmers
offers no evidentiary citations to distinguish that holding, which governs.”
5. The Supreme Court Depublishes Harris II, the Trial Court Denies
Farmers’s Motion for Reconsideration, and Farmers Obtains a Peremptory
Writ of Mandate
Three weeks later, the Supreme Court depublished Harris II, and Farmers
promptly moved for reconsideration of the certification order. (See Harris II, supra,
review den. and opn. ordered nonpub. Oct. 24, 2012, S205297.) Plaintiffs opposed,
arguing depublication was not a change in law sufficient to authorize reconsideration.
The trial court agreed, and denied Farmers’s motion.
Farmers petitioned this court for a peremptory writ, arguing the trial court erred in
concluding it lacked authority to reconsider the certification order. We granted the writ,
concluding “[w]hen a court decision is made on the basis of an opinion that is
subsequently depublished, the law justifying that decision has necessarily changed,”
thereby authorizing the court to reconsider a prior order on its own motion. (Farmers
Ins. Exchange v. Superior Court (2013) 218 Cal. App. 4th 96, 109 (Farmers); see also
Code Civ. Proc., § 1008, subd. (c).) The writ directed the trial court to reconsider the
class certification motion “in the absence of the [Harris II] opinion.” (Farmers, at
p. 112.)
6. The Parties File Supplemental Briefing on Reconsideration
After remand, the trial court ordered supplemental briefing. It directed the parties
to utilize the existing evidentiary record and not to rely on Harris II.
Plaintiffs focused again on the directly related test’s qualitative prong, this time
emphasizing Farmers’s responses to interrogatories as a source of common proof. Their
stated “theory of recovery,” according to Plaintiffs’ opening brief, was that Farmers could
“never prove that its claims adjusters performed ‘qualitatively’ administrative job duties.”
Plaintiffs argued this theory was amenable to common proof—namely, the following
7
portion of Farmers’s answers to interrogatories asking Farmers to “[l]ist all job duties
performed by current and former [department] claims adjusters during the CLASS
PERIOD”:
“[I]nterviewing insureds and witnesses; reviewing and analyzing factual
information to prepare damages estimates; evaluating, determining and
making recommendations regarding coverage; determining causation of,
responsibility for and/or the total value of a claim; negotiating settlements;
and making recommendations regarding litigation on litigated claims. They
determine whether the policy covers the claimed loss, estimate Farmers’
potential exposure on the claim; set a reserve for the claimed loss in
accordance with applicable requirements; assess the credibility of insureds
and witnesses; determine whether any fraud indicators are present with
respect to a claim and advise Farmers’ Special Investigation Unit regarding
possible indicators; identify, evaluate and analyze the potential for
subrogation; identify, analyze and evaluate any underwriting risk associated
with the policy; reevaluate estimated loss exposure and reserve amounts as
new information is obtained; communicate with opposing counsel and
Farmers’ counsel on litigated claims; and prepare cases for arbitration and
attend settlement conferences and trials.”5
5
Though Farmers’s separate response for each department contained the same list
of duties, the responses also included the qualification that individual adjusters’ specific
duties, responsibilities and settlement authority varied, even within the same department,
depending on the nature of the claim. Different claims, the responses explained, “require
different expertise, the performance of different tasks and the evaluation of issues that are
relevant to the different types of claims.” The responses also highlighted differences in
adjusters’ experience levels and how different levels of experience affected an individual
adjuster’s settlement authority. For instance, the responses explained: “Most of these
claims representatives may have many years of experience as a claims representative and
have settlement authority levels ranging from $20,000 to over $500,000. Combined with
other authority levels, some claims representatives handling commercial property losses
can have cumulative authority levels up to a million dollars.”
8
Plaintiffs argued this language constituted an admission by Farmers that all
adjusters “did the same job duties regardless of the types of claims they were adjusting.”
And, while Plaintiffs conceded that some of the tasks listed in Farmers’s responses were
among those identified as qualitatively administrative by the applicable federal regulation
(see fn. 4, ante), Plaintiffs maintained there would be “no need to inquire into each Class
member’s performance of their job duties” to assess the qualitative prong. Rather,
Plaintiffs argued liability under the qualitative prong could be determined by assessing
the nature of Farmers’s business and “draw[ing] a single line” dividing those
administrative duties that involved “ ‘servicing’ [the] business” from those that did not.
With this line drawn, Plaintiffs argued the trier of fact could decide Farmers’s liability by
simply determining whether the duties listed in its interrogatory responses fell “above or
below” the line. “Where that line is drawn,” Plaintiffs asserted, “is a clear merits
question.” For purposes of assessing class certification, Plaintiffs argued the only
relevant inquiry was whether this “line” could be drawn for the entire class based on
common proof.
Farmers insisted Plaintiffs’ “line drawing” approach was contrary to Harris I,
which had rejected the use of a judicially created dichotomy to displace the explicit and
extensive framework set forth in Work Order 4-2001 and the incorporated federal
regulations. (See fn. 3, ante.) Contrary to Plaintiffs’ assertion that an abstract list of job
duties would suffice to assess the qualitative prong for every adjuster in each department,
Farmers argued the appropriate standard under Harris I required the fact finder to
evaluate the work actually performed by each adjuster to determine whether the
adjuster’s work was qualitatively and quantitatively administrative. As an evidentiary
matter, Farmers also disputed the contention that its adjusters’ job duties were uniform.
Pointing to the evidence submitted with its initial opposition, Farmers emphasized
differences in the types of claims adjusted, the work necessary to investigate and adjust
each claim, each adjuster’s settlement authority, and each adjuster’s reliance on
guidelines. Farmers also stressed that, while the named Plaintiffs disclaimed any
autonomy in their work, several other adjusters attested to making complex coverage
9
determinations, while participating in litigation strategy and mediation, and actively
pursuing subrogation. Farmers argued these differences were relevant to determining
whether an individual adjuster engaged in administrative tasks that serviced and had a
substantial effect on the company, particularly in view of several federal court decisions
that had concluded claims adjusters’ duties were directly related to management policies
and general business operations.
7. The Court Denies Class Certification
The trial court denied certification, concluding Plaintiffs “fail[ed] to submit
substantial evidence [demonstrating] that the exemption questions at issue [could] be
answered as to all putative class members using collective proof.” In its written order,
the court acknowledged Plaintiffs’ “theory that the duties performed by adjusters do not
satisfy the ‘qualitative’ element of the administrative exemption.” With regard to the
predominance requirement, the court reasoned that this theory could be certified for class
recovery only if Plaintiffs could “establish through common, class-wide proof that all
class members perform a finite set of specific duties and, based solely on the performance
of those duties, [that] the Court could determine the exempt status of the entire class.”
Addressing Plaintiffs’ assertion that Farmers’s interrogatory responses supplied
the common proof necessary to establish that the putative class did not perform
qualitatively administrative work, the court stated: “Even if Plaintiffs could establish that
all class members perform the same general duties that Plaintiffs have described in their
motion, it does not follow that this would require a finding of liability. While Plaintiffs
attempt to create a shortcut to liability based on a purported uniform legal issue—that
adjusters do not perform duties that can meet the qualitative prong of the exception—no
court, including the California Supreme Court in [Harris I], has determined that the
duties fail to satisfy the administrative exemption as a matter of law.”
Apart from Farmers’s interrogatory responses, the court found the evidence,
“including deposition testimony from the named Plaintiffs and other adjusters,
demonstrate[d] that the work adjusters perform varies greatly and that there are
significant variations in how individual adjusters carry out their job duties.” These
10
variations, the court observed, included differences concerning “the types of claims being
adjusted, the tasks and skills required to handle the various claim types, whether or not
the adjusters perform management duties, whether or not they are tasked with special
assignments, and whether or not they retain experts and the extent to which they
supervise and direct complex litigation.” Further, the court found that “the impact of the
adjusters’ duties and decisions on [Farmers] and its customers varies,” noting that “[t]he
testimony in this case illustrates that there are significant differences between adjusters in
their perceived autonomy, discretion to settle matters, use of manuals and handbooks, and
use of estimating software.” In view of these variations, the court concluded an
individualized inquiry would be required to determine whether each putative class
member performed “ ‘quantitatively’ exempt work” and satisfied “the other elements of
the administrative exemption.”6
DISCUSSION
1. Class Certification Principles
“Code of Civil Procedure section 382 authorizes class actions ‘when the question
is one of a common or general interest, of many persons, or when the parties are
numerous, and it is impracticable to bring them all before the court . . . .’ The party
seeking certification has the burden to establish the existence of both an ascertainable
class and a well-defined community of interest among class members.” (Sav-On Drug
Stores, Inc. v. Superior Court (2004) 34 Cal. 4th 319, 326.) As “ ‘trial courts are ideally
6
The court also found that Plaintiffs failed to offer a viable trial plan for managing
these individualized issues. Because we conclude the court’s ruling with respect to
predominance is sufficient to affirm the order, we need not consider the court’s other
grounds for denying certification. (See Hataishi v. First American Home Buyers
Protection Corp. (2014) 223 Cal. App. 4th 1454, 1469.) Likewise, because each of
Plaintiffs’ separate causes of action is premised on the claim that Farmers misclassified
the putative class under the administrative exemption, we address only this issue and do
not consider the trial court’s other specific grounds for denying certification as to
particular causes of action. (See Lab. Code, § 515, subd. (a) [exempting “administrative”
employees from overtime compensation; Lab. Code, § 226.7, subd. (e) [providing
exemption from meal and rest periods].)
11
situated to evaluate the efficiencies and practicalities of permitting group action, they are
afforded great discretion in granting or denying certification.’ ” (Ibid.) Thus, “in the
absence of other error, a trial court ruling supported by substantial evidence generally
will not be disturbed ‘unless (1) improper criteria were used [citation]; or (2) erroneous
legal assumptions were made [citation]’ [citation].” (Linder v. Thrifty Oil Co. (2000)
23 Cal. 4th 429, 435-436.)
In this case, the trial court determined Plaintiffs’ proposed class and subclasses
lacked the requisite community of interest because Plaintiffs failed to establish
predominant common questions. “The ‘ultimate question’ the element of predominance
presents is whether ‘the issues which may be jointly tried, when compared with those
requiring separate adjudication, are so numerous or substantial that the maintenance of a
class action would be advantageous to the judicial process and to the litigants.’
[Citations.] The answer hinges on ‘whether the theory of recovery advanced by the
proponents of certification is, as an analytical matter, likely to prove amenable to class
treatment.’ ” (Brinker Restaurant Corp. v. Superior Court (2012) 53 Cal. 4th 1004, 1021
(Brinker).) Thus, “[p]resented with a class certification motion, a trial court must
examine the plaintiff’s theory of recovery, assess the nature of the legal and factual
disputes likely to be presented, and decide whether individual or common issues
predominate.” (Id. at p. 1025.) “The affirmative defenses of the defendant must also be
considered, because a defendant may defeat class certification by showing that an
affirmative defense would raise issues specific to each potential class member and that
the issues presented by that defense predominate over common issues.” (Walsh v. IKON
Office Solutions, Inc. (2007) 148 Cal. App. 4th 1440, 1450; Gerhard v. Stephens (1968)
68 Cal. 2d 864, 913.)
12
Though the trial court’s ultimate ruling is reviewed for abuse of discretion
(Brinker, supra, 53 Cal.4th at p. 1017), “[p]redominance is a factual question;
accordingly, the trial court’s finding that common issues predominate generally is
reviewed for substantial evidence.” (Id. at p. 1022.) Under both standards, “[w]e must
‘[p]resum[e] in favor of the certification order . . . the existence of every fact the trial
court could reasonably deduce from the record . . . .’ ” (Ibid.)
Lastly, a class certification motion is procedural—it is “not a license for a free-
floating inquiry into the validity of the complaint’s allegations.” (Brinker, supra,
53 Cal.4th at p. 1023.) “[R]ather, resolution of disputes over the merits of a case
generally must be postponed until after class certification has been decided [citation],
with the court assuming for purposes of the certification motion that any claims have
merit [citation].” (Ibid.) However, “ ‘issues affecting the merits of a case may be
enmeshed with class action requirements.’ ” (Ibid.) “In particular, whether common or
individual questions predominate will often depend upon resolution of issues closely tied
to the merits. . . . [W]hether an element may be established collectively or only
individually, plaintiff by plaintiff, can turn on the precise nature of the element and
require resolution of disputed legal or factual issues affecting the merits.” (Id. at
p. 1024.) In such cases, analysis of the propriety of class certification may entail some
overlap with the merits of the underlying claims, and, in that event, evaluation of the
merits of the plaintiffs’ claims is proper. (Ibid.; Cruz v. Sun World Internat., LLC (2015)
243 Cal. App. 4th 367, 377.)
2. The Administrative Exemption and Directly Related Test
To frame our discussion of the “legal and factual disputes” that impacted the trial
court’s predominance analysis (Brinker, supra, 53 Cal.4th at p. 1025), we begin with the
law governing the administrative exemption, and, in particular, the exemption’s “directly
related” prong.
Labor Code section 515, subdivision (a), exempts certain “executive,
administrative, and professional employees” from overtime compensation. (See also
Lab. Code, § 226.7, subd. (e) [allowing exemption from meal and rest periods].) To
13
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.” (Harris I, supra, 53 Cal.4th at p. 178; Lab. Code, § 515,
subd. (a).) Because the exemption operates as an affirmative defense against claims that
an employer violated the Labor Code’s general overtime pay and meal/rest period
requirements, the employer bears the burden of establishing each prong of the exemption.
(See Ramirez v. Yosemite Water Co. (1999) 20 Cal. 4th 785, 794-795.) Assessing an
exemption defense in a “misclassification [case] will typically require an inquiry into a
particular job type and into the work actually done by individuals within that job
category.” (Mies v. Sephora U.S.A., Inc. (2015) 234 Cal. App. 4th 967, 979.) In this case,
Plaintiffs’ theory of recovery focused on the second prong—whether the work performed
by Farmers’s claims adjusters is “administrative.”
The statutory standards that govern the administrative exemption are to be
“understood in light of the applicable wage order.” (Harris I, supra, 53 Cal.4th at
p. 178.) Under Wage Order 4-2001, an employee comes within the second prong of the
exemption if he or she performs “office or non-manual work directly related to
management policies or general business operations of his/her employer or his
employer’s customers.” (Wage Order 4-2001, subd. (1)(A)(2)(a)(I), italics added.) The
wage order does not define the italicized phrase; rather, it defers to federal regulation,
directing that “[t]he 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.”7 (Wage Order 4-2001,
subd. (1)(A)(2)(f); Harris I, at pp. 179-180.) “So, just as the statute is understood in light
7
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.
14
of the wage order, the wage order is construed in light of the incorporated federal
regulations.” (Harris I, at p. 179.)
Federal Regulations former part 541.205(a) (2000), explains the “directly related”
phrase. It states: “The phrase ‘directly related to management policies or general
business operations of his employer or his employer’s customers’ describes those types of
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.” (Fed. Regs. § 541.205(a) (2000).)
As our Supreme Court explained in Harris I, “[p]arsing the language of the
regulation reveals” the “directly related” phrase has “two components” that must be met
for work to qualify as administrative. (Harris I, supra, 53 Cal.4th at p. 181.) First, the
work must be “qualitatively administrative”—that is, it must be among “ ‘those types of
activities relating to the administrative operations of a business.’ ” (Id. at pp. 180-181 &
fn. 6.) Second, “quantitatively,” the work “must be of substantial importance to the
management or operations of the business.” (Id. at p. 181.) Both the qualitative and
quantitative components must be satisfied for work to be considered “directly related” to
management policies or general business operations. (Harris I, at pp. 181-182.)
Federal Regulations former part 541.205(b) (2000) expounds on the “types of
duties that constitute ‘administrative operations of the business’ ”—i.e., the qualitative
component. (See Harris I, supra, 53 Cal.4th at pp. 182, 188.) The regulation states, in
relevant part: “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.” (Fed. Regs. § 541.205(b) (2000).)
Federal Regulations former part 541.205(c) (2000) elaborates on the phrase “of
substantial importance to the management or operation of the business”—i.e., the
quantitative component. (Harris I, supra, 53 Cal.4th at pp. 181-182.) It provides: “As
15
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.” (Fed. Regs. § 541.205(c) (2000).)
Finally, a series of subparts to Federal Regulations former part 541.205(c) (2000)
expand on the relationship between the qualitative and quantitative components of the
directly related test. Several subparts discuss tasks that presumptively meet the test’s
qualitative component in order to illustrate factors that should be considered in
determining whether those tasks also meet the quantitative prong. (See, e.g., Fed. Regs.
§ 541.205(c)(1)-(c)(5) (2000).) Of particular relevance, former part 541.205(c)(5) (2000)
addresses “claim agents and adjusters” specifically. It states: “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.” (Fed. Regs. § 541.205(c)(5) (2000), italics added.)
Notably, by stating such “advisory specialists” meet “the test of ‘directly related to
management policies or general business operations,’ ” the regulation provides guidance
on both the qualitative and quantitative components of the test. (Ibid., italics added; see
Harris I, supra, 53 Cal.4th at pp. 181-182.)
16
In Harris I, our Supreme Court emphasized the primacy of the statutory language,
while cautioning against the use of a “judicially created” test—the
administrative/production worker dichotomy (see fn. 3, ante)—to determine whether
work is directly related to management policies or general business operations. (Harris I,
supra, 53 Cal.4th at p. 188.) “Read together,” the high court explained, “the applicable
Labor Code statutes, wage orders, and incorporated federal regulations now provide an
explicit and extensive framework for analyzing the administrative exemption.” (Id. at
p. 82.) Given this framework, Harris I directs 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.” (Id. at p. 190.) In doing so, “Federal
Regulations former part 541.205(a), (b), and (c) (2000) must be read together in order to
apply the ‘directly related’ test and properly determine whether the work at issue satisfies
the administrative exemption.” (Id. at p. 188, italics added.) “Only if those sources fail
to provide adequate guidance,” the court concluded, “is it appropriate to reach out to
other sources” to determine whether work meets the directly related test. (Id. at p. 190;
see also id. at p. 188 [faulting lower appellate court majority for applying a test that was
“a judicially created creature of the common law, which [had] been effectively
superseded in this context by the more specific and detailed statutory and regulatory
enactments”]; and see fn. 3, ante.)
With these principles in mind, we turn to Plaintiffs’ theory of recovery and the
trial court’s finding that Plaintiffs failed to establish predominate common issues.
3. The Court Did Not Abuse Its Discretion; Substantial Evidence Supports the
Court’s Finding That Individualized Issues Will Predominate in a Class
Adjudication of the Directly Related Requirement
To reiterate, the requirement that common issues predominate “hinges on ‘whether
the theory of recovery advanced by the proponents of certification is, as an analytical
matter, likely to prove amenable to class treatment.’ ” (Brinker, supra, 53 Cal.4th at
p. 1021.) Consistent with this principle, we begin by revisiting Plaintiffs’ stated theory of
recovery.
17
In their supplemental briefs following remand, Plaintiffs asserted the putative class
was entitled to recovery on their misclassification claims because Farmers could “never
prove that its claims adjusters performed ‘qualitatively’ administrative job duties.” To
demonstrate this theory was amenable to class treatment, Plaintiffs argued that a
paragraph excerpted from Farmers’ interrogatory responses constituted an admission that
“the claims adjusters in this case perform the same job duties regardless of the type of
claims they are adjusting.” Critically, Plaintiffs acknowledged that several of the duties
listed in those responses matched language in Federal Regulations former part 541.205(b)
(2000), which describes tasks that “relat[e] to the administrative operations of a
business.” These included, among other things, “making recommendations regarding
coverage”; “negotiating settlements”; “making recommendations regarding litigation”;
“determin[ing] whether any fraud indicators are present with respect to a claim and
advis[ing] [Farmers’s] Special Investigation Unit regarding possible indicators”;
“identify[ing], evaluat[ing] and analyz[ing] the potential for subrogation”; and
“identify[ing], analyz[ing] and evaluat[ing] any underwriting risk associated with the
policy.” (Cf. Fed. Regs. § 541.205(b) (2000).) Notwithstanding this concession,
Plaintiffs maintained the interrogatory responses were legally sufficient to support their
theory of recovery because, they argued, “while some advising, planning, negotiating and
representing duties may qualify as qualitatively administrative others do not.” Focusing
on the phrase “ ‘servicing’ a business” in former part 541.205(b) (2000), Plaintiffs
asserted the trier of fact could decide Farmers’s liability to the class by assessing the
nature of Farmers’s business and drawing a “line” to determine whether the tasks listed in
Farmers’s interrogatory answers involved servicing its business or not. Plaintiffs
maintained this “merits” question could be answered without “inquir[ing] into each Class
member’s performance of their job duties.”
The trial court rejected Plaintiffs’ contention that the exemption issue could be
resolved by reference to Farmers’s interrogatory answers, concluding that individualized
evidence of what each putative class member actually did would be necessary to
determine whether his or her work satisfied the directly related requirement. With regard
18
to Plaintiffs’ contention that Farmers’s interrogatory responses were sufficient to defeat
the exemption defense for the entire class, the court ruled that Plaintiffs’ line drawing
approach was not legally tenable because the “[f]ederal regulations . . . specifically
identify the ‘core duties’ identified by Plaintiffs . . . as administratively exempt work”
and “no court, including the California Supreme Court in [Harris I], has determined that
the duties fail to satisfy the administrative exemption as a matter of law.”8 Having
determined Plaintiffs failed to satisfy their burden with respect to the qualitative prong,
the court also addressed the quantitative component, and found individual inquiries were
necessary to determine whether each putative class member performed quantitatively
exempt work. And, because Plaintiffs failed to show they could establish liability
through “common proof that all adjusters perform the same duties, and more importantly
perform them in the same manner,” the court concluded “certification [was]
inappropriate.”
On appeal, Plaintiffs contend the trial court improperly ruled on the merits of their
misclassification claims and erroneously concluded Farmers’s interrogatory responses
were insufficient to establish class liability on their theory of recovery. In that regard,
Plaintiffs argue evidence concerning “differences among the day-to-day tasks performed
8
We disagree with Plaintiffs’ contention that the court improperly reached the
merits by assessing whether the tasks listed in Farmers’s interrogatory responses were
qualitatively administrative. Just as a legally compliant off-the-clock policy cannot be
used to show a rest period claim is amenable to common proof, so too Farmers’
interrogatory responses—insofar as they listed tasks that are qualitatively
administrative—could not be used to show Plaintiffs’ misclassification claim should be
certified for class treatment. In the rest period case, liability can be established only by
showing a deviation from the policy, thus raising individualized issues. (See, e.g.,
Brinker, supra, 53 Cal.4th at p. 1051 [where defendant’s formal off-the-clock policy was
consistent with state law, and anecdotal evidence showed only a handful of individual
instances in which employees worked off-the-clock, certification of rest period claim was
properly denied].) So too, here, insofar as the tasks listed in Farmers’s responses were,
by definition, qualitatively administrative, individual claims adjusters can establish
misclassification under the qualitative prong only be showing that they did not engage in
these tasks. It was therefore incumbent upon the trial court to reach this issue in
connection with ruling on Plaintiffs’ certification motion.
19
by class members” was irrelevant, because, they contend, the “qualitative inquiry” is
limited to assessing the “functional role” that employees “play within the structure of [a]
business.” (Italics added.) Plaintiffs base their functional role test on language in Federal
Regulations former part 541.205(b) (2000) explaining the “administrative operations of
the business” include “the work performed by so-called white-collar employees engaged
in ‘servicing’ a business.” (Italics added.) Plaintiffs argue the exemption defense can be
resolved on a class-wide basis by deciding, as a factual matter, whether the duties listed
in Farmers’s interrogatory responses “related to the ‘core day-to-day business’ of the
company or whether [the claims adjusters] ‘participate[d] in policy-making or alter[ing]
the general operation of the business’ ”—the latter being qualitatively administrative, the
former, not. To resolve this question, Plaintiffs assert “the trier of fact will simply be
required to analyze [the adjusters’ ‘functional’] role, compare it with the roles played by
others employed by [Farmers], and examine the nature of [Farmers’s] overall business to
determine whether class members are helping the organization run or are carrying out its
day-to-day affairs.”
Because Plaintiffs’ “functional role” test served as the lynchpin for their assertion
that the exemption defense could be adjudicated for the entire putative class upon
common proof (i.e., Farmers’s interrogatory responses), the legal merits of that test were
inextricably enmeshed with the predominance inquiry, and we find no error in the trial
court considering the merits on that narrow issue. (See Brinker, supra, 53 Cal.4th at
pp. 1023-1024.) Thus, with regard to predominance, while the court was obliged to
assume that Plaintiffs’ misclassification claims had merit, the court correctly discerned
that the critical certification question was whether Farmers’s exemption defense could be
resolved in favor of all putative class members by proving that claims adjusters
performed the same “core duties” listed in Farmers’s interrogatory responses. And,
because several of the duties listed in those responses were, as Plaintiffs conceded,
among the qualitatively administrative tasks enumerated in Federal Regulations former
part 541.205(b) (2000), the court also properly recognized that answering the certification
question required it to consider the legal merits of Plaintiffs’ contention that “some
20
advising, planning, negotiating and representing duties” do not qualify as qualitatively
administrative if an employee’s “functional role” merely involves “carrying out [the
business’s] day-to-day affairs.” In resolving the certification question, the trial court
concluded the words of the statute controlled and that Plaintiffs’ “functional role” test
was contrary to the Supreme Court’s holdings in Harris I. We agree with this
conclusion.
The Supreme Court’s directive in Harris I is clear—“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 . . . is it appropriate to reach out to other sources.” (Harris I,
supra, 53 Cal.4th at p. 190, italics added.) Contrary to this directive, Plaintiffs’ proposed
functional role test amounts to an illegitimate gloss on the meaning of the phrase
“engaged in ‘servicing’ a business.” (Fed. Regs. § 541.205(b) (2000).) This is because
Federal Regulations former part 541.205(b) (2000) provides entirely adequate guidance
as to what that phrase means in this context. According to former part 541.205(b) (2000),
“engaged in servicing a business” means “advising management, planning, negotiating,
[and] representing the company.” (See also Harris I, at p. 182.) By arguing the statute’s
plain language means what it says only if an employee’s “functional role” involves
“ ‘policy-making or alter[ing] the general operation of the business,’ ” Plaintiffs
effectively seek to import a qualification into the qualitative prong that has no basis in the
text of former part 541.205(b) (2000). This again is contrary to the Supreme Court’s
clear directive in Harris I, and the trial court properly rejected it as such.9 Further,
9
The authorities Plaintiffs cite to support their “functional role” test are essentially
inapposite in light of Harris I. These cases were largely decided before Harris I and fail
to distinguish between the directly related test’s qualitative and quantitative components.
In discussing whether an employee’s “function” or “role” brings the employee within the
administrative exemption, nearly all of these cases apply the administrative/production
worker dichotomy rejected in Harris I. (See, e.g., Combs v. Skyriver Communications,
Inc. (2008) 159 Cal. App. 4th 1242, 1264 [applying current version of Federal Regulations
part 541.201, rather than qualitative/quantitative prongs defined in former part 541.205
(2000) as directed by Harris I]; Desmond v. PNGI Charles Town Gaming, L.L.C. (4th
21
because Plaintiffs’ “functional role” test constituted the sole legal justification for their
contention that Farmers’s interrogatory responses were sufficient to defeat the exemption
defense for the putative class, in rejecting that non-statutory test, the trial court correctly
concluded that Plaintiffs failed to establish predominate common issues with respect to
the qualitative prong.
To be clear, while “advising the management, planning, negotiating, [and]
representing the company” are, by definition, qualitatively administrative tasks
(Fed. Regs. § 541.205(b) (2000)), this does not necessarily mean that all such tasks are
“ ‘directly related to management policies or general business operations.’ ” (Id.
§ 541.205(a) (2000), italics added.) However, contrary to Plaintiffs’ proposed functional
role test, the dividing line cannot be derived from a non-statutory definition of the phrase
“ ‘servicing’ a business.” Rather, the line must be drawn, as the statute directs, according
to whether the employee’s qualitatively administrative work is “of substantial importance
to the management or operation of the business”—that is, whether the work meets the
quantitative prong of the directly related test. (Id. § 541.205(c) (2000).) Reading the
parts together, as Harris I directs that we must (see Harris I, supra, 53 Cal.4th at p. 188),
the regulation expressly recognizes that not all tasks that involve “advising the
management, planning, negotiating, [and] representing the company” are “ ‘directly
related to management policies or general business operations,’ ” because not all such
Cir. 2009) 564 F.3d 688, 693 [same]; Eicher v. Advanced Business Integrators, Inc.
(2007) 151 Cal. App. 4th 1363, 1372 [applying administrative/production worker
dichotomy as articulated in Bell v. Farmers Ins. Exchange (2001) 87 Cal. App. 4th 805];
Reiseck v. Universal Communs. of Miami, Inc. (2d Cir. 2010) 591 F.3d 101, 107
[considering “administrative/sales distinction”]; Davis v. J.P. Morgan Chase & Co. (2d
Cir. 2009) 587 F.3d 529, 535 [concluding “job of underwriter as it was performed at
Chase falls under the category of production rather than of administrative work”]; Copas
v. E. Bay Mun. Util. Dist. (N.D. Cal. 1999) 61 F. Supp. 2d 1017, 1021-1022 [discussing
distinction between “administrative positions” and employees engaged in “ ‘[p]roduction’
or ‘line’ work”]; cf. Martin v. Ind. Mich. Power Co. (2004) 381 F.3d 574, 582 [rejecting
administrative/production worker dichotomy, holding plaintiff did not come within
administrative exemption because his work “in no way involved” tasks listed in Federal
Regulations former part 541.205(b) (2000)].)
22
tasks are “of substantial importance to the management and operation of the business.” 10
(Fed. Regs. §§ 541.205(a), (b) & (c) (2000).)
The trial court’s appreciation of this distinction is reflected in its conclusion that
individualized inquiries were necessary to determine whether the work actually
performed by a given adjuster satisfied the administrative exemption’s directly related
test. Having correctly determined that the tasks listed in Farmers’s interrogatory
responses were, by definition, qualitatively administrative under Federal Regulations
former part 541.205(b) (2000), the court logically considered whether misclassification
under the quantitative prong could be determined upon common proof for the entire class.
In that regard, the court found that “the impact of the adjusters’ duties and decisions on
[Farmers] and its customers varie[d],” and that the evidence demonstrated “significant
differences between adjusters in their perceived autonomy, discretion to settle matters,
use of manuals and handbooks, and use of estimating software.” As the trial court
concluded, all of these differences will be relevant to determining whether an individual
adjuster’s qualitatively administrative work was “of substantial importance to the
management or operation of the business.” (Fed. Regs. § 541.205(c) (2000).) The court
did not err in ruling individual inquiries were necessary to determine whether a particular
claims adjuster’s work satisfied the directly related prong of the administrative
exemption.
10
The only post-Harris I decision cited by Plaintiffs is Rieve v. Coventry Health
Care, Inc. (C.D. Cal. 2012) 870 F. Supp. 2d 856 (Rieve) and it is not persuasive. In Rieve,
the federal district court, although purporting to examine the qualitative component
expressly based its conclusion that “not all employees who interact with the public
perform administratively exempt duties” on the quantitative prong. (Id. at p. 873, italics
added [citing Federal Regulations former part 541.205(c)(1)—i.e., the quantitative
prong].) Rieve does not support Plaintiffs’ contention that some advising, planning, and
negotiating tasks are not qualitatively administrative. Rather, Rieve is consistent with our
conclusion that not all qualitatively administrative tasks are administratively exempt,
because not all such tasks satisfy the directly related test’s quantitative prong.
23
DISPOSITION
The order denying class certification is affirmed. Defendant Farmers Insurance
Exchange is entitled to its costs on appeal.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
HOGUE, J.*
We concur:
ALDRICH, Acting P. J.
LAVIN, J
*
Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to
article VI, section 6 of the California Constitution.
24