Wage and Hour Liability.

Large and small employers alike are increasingly becoming the target of multi-million-dollar claims by current and former employees for violations of California and federal wage and hour laws, due to a recent proliferation of lawsuits. These claims involve large damage demands for overtime compensation, as a result of alleged misclassification of employers as exempt from overtime pay under wage and hour laws. These claims are particularly troubling to employers due to the fact that plaintiffs can recover attorneys fees and other costs, as well as up to three years of unpaid wages. Employers may also be subject to significant civil penalties.

Employees who are appropriately classified as "exempt" from California and federal wage and hour laws are not entitled to overtime compensation, breaks or meal periods. The most common exemptions found in both state and federal law are the "white collar" exemptions for administrative, executive, and professional employees. Employees must generally satisfy both a "salary" test and a "duties" test in order to qualify for these exemptions.

New Interpretation

Farmers Insurance Exchange is the most recent employer to team the expensive and hard lesson about the dangers of misclassifying employees. Farmers, like many employers, routinely classified employees who are paid on a salary basis, and who participate in supporting the company's policies and practices, as exempt administrative personnel. Federal and California law provide that in order satisfy the administrative employee status test, the employees' primary duties must consist of the performance of office or non-manual work directly related to management policies or general business operations of the employer or its customers, and must include the regular exercise of discretion and independent judgment.

Farmers classified its claims representatives as exempt administrative employees, based upon its assessment that its claims representatives were directly engaged in applying management policies to customer claims, and that their decisions to award thousands of dollars in damage awards directly affected the general business operations of Farmers.

Analyzing the complicated rules of the various federal and state wage and hour laws, the Farmers court found that the claims adjusters were not functioning in an "administrative capacity," and therefore not exempt from overtime pay. In arriving at this conclusion, the court articulated an additional factor in the administrative exemption test, noting that employees must function in an administrative "role" in the organization, as well as perform the administrative duties and receive a salary. The court reviewed several federal cases which described the dichotomy between a production role and an administrative role in an employer organization. Applying these cases, the Farmers court found that the primary role of the claims representative was part of the production side of the business, and not administrative in nature.

Conclusion

The recent Farmers decision represents a shot across the bow for all California employers. Employers should be on full-alert that their wage and hour classification practices may be closely scrutinized by an increasingly sophisticated and litigious work-force, supported by knowledgeable and aggressive plaintiff attorneys who specialize in class-action litigation. Employer exemptions for administrative, executive, and professional employees appear lobe particularly fertile ground for law suits because of the intricate, often complicated state and federal regulations surround these exemptions, and employers' general lack of understanding of how to apply these rules to specific positions.

The fallout from Farmers is likely to send employers scrambling to their human resources departments to review the current classifications of their administrative exempt employees to assess whether they have unknowingly exposed themselves to legal liability. This is a prudent first step but employers should not stop there. Employers should also take actions to ensure that their organizational pay practices and classification schemes adequately reflect current state and federal requirements. This should be accomplished through a thorough audit of these systems, paying particular attention to all positions classified as exempt from wage and hour law. Without this type of diligence, employers may face stiff legal challenges from within the ranks of their own workforce.

Richard M. Albert is the Managing Partner of Foley & Lardner's Los Angeles office. Lynn B. Goodfellow is an Associate in the firm's San Diego office.