California Overtime Law – Administrative Exemption Clarified

One of the most vague and, as a result, frequently disputed and litigated claims by workers is whether they are entitled to overtime compensation or whether they are properly classified as exempt under administrative exemption as provided in Federal Labor Standards Act (FLSA) and the applicable federal regulations. This article clarifies the administrative exemption standard as it has been recently applied by California courts.

First, it is important to note that exemptions from overtime compensation requirements are narrowly construed against the employer, and their application is limited to those employees who plainly and unmistakably within their terms. Bell v. Farmers Ins. Exchange (2001).

Generally, except satisfying the minimum rate of salary requirement, which is regularly adjusted, exempt administrative work must be (1) non-manual; and (2) related to management policies or general business operations of the employer or the employer’s customers; and (3) must involve the customary and regular exercise of discretion and independent judgment.

One key requirement that has been hotly contested and litigated is the meaning of the work being “directly related to management policies and general operations of the employer or the employer’s customers” as required by the regulations defining administrative exemption. The California courts rejected the argument often made by employers that “management policies and general operations” must be interpreted broadly and it applies to any employee who exercises minimal discretion in his work.

Under California law, the construction of the above language is much more narrow. The actual test is whether the activities are directly related to management policies or general business operations. This has been interpreted as running of the business and not merely the day to day carrying out of its affairs. Bratt v. County of Los Angeles (1990). The Bratt court considered whether the county probation officers are exempt from overtime under administrative exemption. The court concluded that although 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. Thus, the duties of those employees did not qualify them as exempt administrative employees, even though conceivable some probation officers might be exempt. This is the reason that insurance adjusters have been held to be eligible for overtime compensation by numerous courts in California and not be exempt under administrative exemption.