Not All Claims Representatives Are Alike, Court Says
By Susan Massmann
Decisions of Note
From the January 2004 issue of Claims Magazine
While our founding fathers pronounced that we are all created equal, roughly a millisecond after that moment of creation we begin to be sorted into a multitude of different classifications—male, female, tall, short, intelligent, not so bright. And, when we enter the work force, we are split up again—exempt or nonexempt.
Exempt employees meet certain criteria that exclude them from the overtime pay requirements established by the Fair Labor Standards Act (FLSA). Nonexempt employees are included and are entitled to compensation when they work overtime, which is usually more than forty hours a week.
Many claims professionals are miffed about their classification as exempt employees and have filed suits against their employers to collect overtime pay. For example, over 1,000 Progressive claim representatives filed suit in early 2003, claiming they were improperly compensated.
The Unites States Code states that bona fide administrative employees are exempt from overtime pay requirements. The Code of Federal Regulations provides a test for determining if the employee is exempt. A bona fide administrative employee is one
1.who is compensated on a “salary basis” at a rate of at least $250 per week; and
2.whose “primary duty consists of…[t]he performance of office or nonmanual work directly related to management policies or general business operations of his employer or his employer's customers;” and
3.whose duties include work “requiring the exercise of discretion and independent judgment.”
In a recent decision, In Re Farmers Insurance Exchange Claims Representatives' Overtime Pay Litigation, No. MDL 22-1439, 2003 WL 22662473 (D.Or. Nov. 6, 2003), a U.S. District court decided that not all claims representatives should be viewed in the same light when applying the federal test.
Personal lines claims representatives who were employed by Farmers Insurance Exchange claimed that Farmers violated the Fair Labor Standards Act by misclassifying them as exempt employees.
The claims representatives handled auto physical damage claims not involving personal injury, bodily injury and personal injury and death liability claims, property claims, and claims under Farmers' Foremost policy.
Farmers bore the burden of proving that the employees were exempt and was responsible for showing that each prong of the federal test was met. The court found that the first criterion was met: Farmers paid the claim representatives at least $250 per week on a salary basis. The court then examined the two duties prongs of the test.
The first facet of the duties test is that the employee's work be “directly related to management policies or general business operations of his employer or his employer's customers.” The Department of Labor (DOL) explains that the phrase “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.”
The court acknowledged that the DOL regulations actually cite “claim agents and adjusters” as examples of those who meet the test. However, the court said that the decision of whether the representatives were exempt or not rested on what they actually do, not on their titles.
The second part of the test hinges on the employee's use of “discretion and independent judgment” in his primary job duties. The DOL further explains that “the discretion and independent judgment exercised must be real and substantial, that is, they must be exercised with respect to matters of consequence.” The employee's decisions do not necessarily have to be final or apply unlimited authority for this criterion to be met.
After this litigation had begun, the DOL issued an opinion letter determining that “insurance claims adjusters perform work that is administrative in nature.” However, the court pointed out that the DOL did not distinguish among categories of claims adjusters in reaching that opinion.
All of Farmers' claims representatives performed generally the same duties for any claim: representing those involved in the claim, determining if the loss was covered under the policy, planning how the claim will be handled, investigating the claim, determining reserves, looking for fraud indicators, and other similar duties. Most of the reps had a authority amount for settling claims, depending on their experience level.
The reps' duties did not involve supervising, evaluating, hiring or firing other employees; making budgetary, financial or employee benefits decisions; marketing, selling, advertising, developing, or pricing products; investing; regulatory oversight; obtaining legal counsel; developing claims handling policy or procedure; reviewing other reps' claims files; or authority to deny coverage or to initiate fraud investigations.
Although all of the reps performed tasks that were nonmanual in nature and directly related to Farmers' management policies and business operations, the court found that some of the reps relied on the use of skills and knowledge of policies and procedures instead of meeting the third prong, exercise of discretion and independent judgment.
The court addressed the four categories separately:
·Liability claims representatives—The court said that because these reps made recommendations for actions instead of merely taking action, they exercised considerable independent judgment. Thus, Farmers met the burden of proving that these reps were exempt.
·Auto physical damage representatives—The court placed these reps on the opposite end of the spectrum from liability reps. These reps only applied techniques and standards but did not exercise discretion and independent judgment. Farmers, therefore, violated the FLSA by classifying these reps as exempt.
·Property representatives—The court found this determination more difficult because a wide range of activities were encompassed within the category. The court divided this category into two subcategories: reps who handled average losses less than $3,000 per month and those whose averages were more than $3,000 per month. Farmers violated the FLSA with respect to the lower level reps but not the higher level.
·Foremost and multiline representatives—The court made a similar determination for these reps and the same ruling that Farmers violated the FLSA for some of the reps and not for others.
The court's opinion is important in the overtime debate. Not all adjusters are equal in the jobs they perform, and such factors should be considered when categorizing an employee as exempt or not.