California OT Case Could Trigger More

That earlier ruling is already spawning additional suits, reported Samuel Sorich, vice president and Western regional manager of the National Association of Independent Insurers, based in Des Plaines, Ill.

"In the aftermath of the Court of Appeal's ruling, there have been a number of other class actions filed against other insurance companies," he said.

He indicated that there are now about 175 class actions pending in California on the issue of overtime. However, he noted that many of those are against retail stores, not insurers.

Mr. Horvitz said overtime pay is "a very hot issue nationwide within the insurance industry, within the banking industry, within virtually all industries where you have salaried employees."

Under Mr. Horvitz's "popcorn" theory of litigation, "certain issues heat up like a bag of popcorn and when it reaches a certain temperature, all the kernels start popping–I think that's where we are now with these overtime cases."

The plaintiffs alleged that, although they frequently worked more than 40 hours per week, Farmers paid them no overtime. The insurer claimed that the claims representatives were exempt from overtime pay under California wage and hour laws because they performed "administrative" functions.

As explained by Mr. Sorich, the trial court sided with the plaintiffs after comparing a state wage order from the California labor regulator with federal regulations and federal court cases.

The trial court found that the federal cases use an "administrative/production worker dichotomy," Mr. Sorich said. The essential difference between the two types of workers is that administrative employees are "directly related" to management policies or general business operations while production workers are not.

To the trial court, it appeared that the Farmers claims adjusters were not administrative workers because they engaged in no management functions and merely processed claims. The Court of Appeal agreed, concluding that Farmers adjusters were "rank and file production workers."

Both the trial and appellate courts focused on the fact that the claims representatives could adjust claims only up to $15,000. For any larger amount, they had to consult a higher authority, such as a branch manager–a fact that the courts found pivotal.

Mr. Sorich suggested that it is arbitrary and unwise for the courts to use a monetary level to decide who is a production worker and who is an administrator.

"I think you have to look at the process itself," Mr. Sorich said. He added that NAIIs member companies have indicated that "what a claims person does on a case has an effect on the operations" of the insurance company.

Mr. Horvitz said that the U.S. Supreme Court was petitioned to review the Court of Appeal decision after the California Supreme Court turned down Farmers petition to review that finding.

He explained that the pending petition to the U.S. Supreme Court challenges the interpretation of the federal regulations on which the lower courts based their reading of state law.

Mr. Horvitz added that the jury award is the subject of a separate appeal based on other issues.

The NAII had filed a letter brief in support of Farmers petition to the California Supreme Court. In the letter, the NAII pointed out that in comparable situations, federal courts have found that "people like [the Farmers plaintiffs] were administrative employees where a bit of discretion and judgment was exercised," Mr. Sorich said.

Moreover, the letter noted that "the federal regulations specifically identify claims adjusters as one example of an exempt administrative classification, as compared to mere insurance inspectors, who are not exempt."

To Mr. Sorich, "the unfortunate thing of the whole situation" is that the lack of clarity and definition in the law is "encouraging litigation." This in turn raises costs for not only for insurers but for "all kinds of businesses," he observed.

He indicated that companies are handling the spate of lawsuits in a variety of ways. The NAII pointed out in its letter to the California Supreme Court that "the sheer potential exposure of the pending class actions forces most defendants to settle rather than incur the risk of litigating in uncharted territory."

While some insurers have been reclassifying claims adjusters, other companies "feel secure that [claims adjusters] are truly administrative employees," Mr. Sorich said.

He indicated that the NAII sees claims adjusters as professionals who do much more than shuffle paper.

"Our view is that the typical claims person is exercising quite a bit of discretion in making judgment calls that are significant," he stated. "That is not a production employee–that is a person who is involved in administration and management of the company," he added.

In contrast, the California decisions seem to equate claims adjusters with factory workers. "I think this kind of categorization is a step backwards for those people who want to make a career out of adjusting claims," Mr. Sorich stated.

Mr. Horvitz agreed that this was the tone of the court decisions. He stated that the problem with these overtime-pay cases is that "you're dealing with a very old regulation which was written when most of the laboring force was blue collar."

In his view, this approach no longer works "because we've changed largely from a production society to a service society.

"It's really a whole new ball game, and we're seeing the consequences of it now," Mr. Horvitz observed.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 5, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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