United States Court Of Appeals Holds That Insurance Company’s Adjusters Are Not Entitled To Overtime Pay Under The Fair Labor Standard Act (“FLSA”)

In Miller v. Farmers Insurance Exchange (2006 WL 3026037, 11 Wage & Hour Cas.2d (BNA) 1729, 06 Cal. Daily Op. Serv. 9960, 9th Cir.(Or.), Oct. 26, 2006), the United States Court of Appeals addressed the issue of whether an insurance company improperly classified its adjusters as exempt from the Fair Labor Standard Act’s overtime requirement. The Court of Appeals concluded that the adjusters are exempt from the overtime requirement and, therefore, are not entitled to overtime pay for hours worked over 40 hours per week.

Facts

Farmers Insurance Exchange (“Farmers”) is an inter-insurance exchange company which provides insurance to customers throughout the United States. Approximately 50% of Farmers’ employees are claims adjusters, most of whom work out of their own homes and utilize company equipment. Farmers employs 5 types of adjusters: automobile damage adjusters, property adjusters for homeowners’ claims, liability adjusters for personal injury claims, “Foremost” adjusters for mobile home and recreational vehicle claims, and multi-line adjusters for claims involving two or more different types of losses. Farmers provides the adjusters with written guidelines and materials to help them in handling claims and the adjusters use computer software to help estimate damage or loss. Farmers pays all of its claims adjusters on a salary basis and does not pay them overtime if they work over 40 hours per week.

In late 2001 and early 2002, approximately 2,000 former and current claims adjusters filed a lawsuit against Farmers in which they alleged that Farmers improperly classified them as exempt from the overtime requirements of the Fair Labor Standard Act (“FLSA”). The adjusters sought to recover overtime pay for hours they had worked in excess of 40 hours per week. A federal district court held that the automobile adjusters are non-exempt employees under the FLSA, liability adjusters are exempt from the overtime requirement, and property, Foremost, and multi-line adjusters may or may not be exempt depending on the amount of each adjuster’s monthly claims payout.

Decision

Federal law provides that certain employers must pay their employees time and a half for hours worked in excess of 40 hours per week. 29 U.S.C. § 207(a)(1). Some employees are not covered by the FLSA, including those employees “employed in a bona fide . . . administrative . . . capacity.” 29 U.S.C. § 213(a)(1). The Secretary of Labor has formulated a test for employees who earn at least $250 per week to determine whether such employees qualify for the administrative exemption. This test, known as the “short duties test,” provides that in order to qualify as an exempt employee “the employee’s ‘primary duty’ must (i) consist of ‘[t]he performance of office or nonmanual work directly related to management policies or general business operations of his employer,’ and (ii) include the exercise of ‘discretion and independent judgment.'” The Court of Appeals concluded that this test should apply to Farmers’ adjusters because they make more than $250 per week and there is no dispute that the adjusters perform “office or nonmanual work.”

The Department of Labor (“DOL”) recently added a regulation which provides that an insurance claims adjuster generally meets the duties requirements of the administrative exemption test if the adjuster’s duties include conducting interviews; inspecting property damage; reviewing information to provide damage estimates; valuing and making recommendations regarding whether claims should be covered; determining liability and coverage for claims; negotiating settlements of claims; and making recommendations regarding litigation of claims. 29 C.F.R. § 541.203.

The Court of Appeals noted that § 541.203 was not in effect at the time that the adjusters filed their lawsuit against Farmers. However, the Court found that § 541.203 did not represent a change in the law. The DOL’s position that claims adjusters are exempt from the overtime requirement has been consistent over the years. A previous DOL regulation, 29 C.F.R. § 541.205(c)(5), provided that the “directly related to management or general business operations” portion of the duties test is met by claims agents and adjusters. Also, as far back as 1940, the DOL concluded that claims adjusters use “their own judgment about what the facts show, who is liable, what a claim is worth, and how to handle the negotiations with either a policyholder or a third-party.”

The Court of Appeals found that DOL does not require that an adjuster perform every duty listed in § 541.203 in order to be exempt from the overtime requirements. The Court of Appeals also found that no exceptions should be made for adjusters who handle smaller claims. It further found that the adjusters’ use of computer software to estimate claims did not eliminate the need for the adjusters to exercise independent judgment and discretion.

The Court of Appeals concluded the district court erred in concluding that some types of Farmer’s adjusters were exempt and some were non-exempt. The Court of Appeals found that Farmers’ “adjusters are required to do virtually all of the very things that § 541.203 contemplates.” Therefore, the Court held that all of Farmers’ adjusters are exempt from the FLSA overtime requirement.

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