California Overtime Law: Administrative Exemption
To qualify for the administrative exemption from overtime compensation requirement an employee must be primarily engaged in a work of a type that is "directly related to management polices or general business operations." This requirement of course must be interpreted as it is inherently vague. In one sense, every type of work directly relates to management policy because every employee does work that carries out, or is governed by, management policy. But for obvious reasons, such an interpretation wouldn't make sense, as it would make virtually all employee exempt from overtime.
In Harris v. Liberty Mutual Insurance Co. (2007), the court clarified that the work is "directly related to management policies or general business operations" for the purposes of determining whether administrative exemption applies only if it "relates to the administrative operations of a business as distinguished from 'production' or in a retail or service establishment 'sales" work." This means, the court continued, that only work performed at the level of policy or general operations can qualify as "directly related to management policies or general business operations." On the other hand, work that merely carries out the particular, day-to-day operations of the business is production and not administrative work, and thus doesn't qualify for administrative overtime exemption.
The Harris court, applying this analysis, found that insurance adjusters, who sued the defendant for unpaid overtime, were primarily engaged in "production" - adjusting individual claims for their employer. They investigate claims, make coverage determination, set reserves, negotiate settlements, make settlement recommendations for claims beyond their settlement authority, identify potential fraud, and so forth. Noe of that work was found to be carried out at the level of management policy or general operations. Rather, it is all part of the day-to-day operation of defendants' business.
The employer in Harris argued that the company's adjusters should be covered by administrative exemption from overtime compensation because they advise management on important decisions and participate in planning, negotiating and representing the company, which, according to Liberty Mutual, should have been considered administrative work. The court disagreed, holding that in order for such tasks to fall on the administrative side, they must be carried on at the level of policy or general operations as these were part of the employees' "routine day-to-day production work," comparable to that of a salespersons who negotiate prices and terms, represent the company, and purchase non-inventory products that customer requests.
The term "production" should not be taken literally when considering California administrative exemption from overtime compensation. For example, a law firm's product is legal advice and legal representation, not secretarial services. A secretary at a law firm therefore does not produce the firm's product as to do so would constitute providing unauthorized legal advice, and the secretary's work is a classic example of non-exempt production work, as it has nothing to do with policy or general operations (except in the sense that, like every employee's work, it is governed by policy). Rather, the secretary's work relates entirely to the day-to-day carrying on the firm's affairs.
