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For years, California employers have been able to classify certain well-compensated administrative employees, like insurance adjusters, as exempt from California’s overtime laws. Those employees have enjoyed certain privileges: For example, they are allowed to take the morning off to care for a sick child, or, perhaps, leave a little early from work to run errands or do a little holiday shopping � without getting docked pay. But now those employees might want to remain at their desks, because the Second District Court of Appeal last month rewrote the “administrative exemption” applicable to many of them. Employees who used to have flexibility in their schedules may need to start punching time cards when they enter and exit the office, because the court of appeal’s decision in Harris v. Superior Court, 07 C.D.O.S. 9783, if allowed to stand, may significantly damage the viability of the administrative exemption under California law. The California Supreme Court should review and overturn the decision. Under the administrative exemption, employers in California need not pay overtime to employees who meet certain criteria, which, before Harris, were relatively straightforward. The exemption requires that exempt employees: (1) have a salary that meets a minimum threshold; (2) perform duties that primarily require them to exercise discretion and independent judgment; (3) perform office or nonmanual work directly related to the management policies or general business operations of an employer or the employer’s customers; and (4) regularly and directly assist a proprietor or another bona fide executive or administrative employee; perform work along specialized or technical lines requiring special training, experience or knowledge; or execute special assignments and tasks, all under only general supervision. However, the Harris court decided that most of the criteria for meeting the exemption are essentially irrelevant. In evaluating whether insurance claims adjusters were improperly classified as exempt, the court addressed only one element of the administrative exemption criteria � whether the adjusters primarily do work that is “directly related to management policies or general business operations.” Then, relying on questionable assumptions and logic, the court proceeded to all but dismantle the exemption entirely, substantially increasing the risk for California employers in classifying employees as exempt, and more practically, destroying all hope for a late afternoon, and paid, off-the-clock latte for California workers of those employers. The court utilized an analytical construct known as the “administrative/production worker dichotomy.” Courts have used this so-called “dichotomy” as a tool for determining whether certain types of work qualify for the administrative exemption, the general idea being that an employee who “produces” the employer’s product is different from an “administrative” employee who may be eligible for the “administrative” exemption if all of the other elements of the exemption were present. Until Harris, it was only a “tool” for interpretation. However, mistakenly believing that this is a black-and-white test, the court concluded that every job must be either a nonexempt “production” job or an exempt “administrative” job. To illustrate the point, the court noted, correctly, that a secretarial job is a “paradigmatically nonexempt” position. The court also observed, however, that a secretary does not produce his employer’s product. This put the court in a quandary: here was a nonproduction employee who nevertheless should be nonexempt. But, what to do? How can he be nonproduction, and yet nonexempt? To get around this problem, the court declared that “producing an employer’s product is not a necessary condition for doing production … work [emphasis added].” Now the nonproduction secretary is suddenly a production employee, allowing the court to reach its desired conclusion: The secretary is nonexempt, and production work is nonexempt, therefore the secretary is a production worker. This logic is similar to a person reasoning that because he is not green, and squirrels are not green, he must be a squirrel. The court did not have to resort to this dubious reasoning to protect California’s workers. No one would reasonably dispute that a secretarial position is likely nonexempt. However, that does not mean the secretary is a production employee, or that he is not an “administrative” employee. He can be both administrative and nonexempt because, while he serves administrative functions, he may not exercise the type of independent judgment and discretion required by the other elements of the administrative exemption. In its understandable desire to protect those who genuinely should be entitled to overtime, the court stretched the concept of “production” work far beyond its logical limits, and in doing so essentially destroyed the administrative exemption. The dichotomy between administrative and production work does not even apply easily to many types of businesses, and should not have been applied here. It has little or no relevance in the services sector because it is difficult to draw a bright line between “production” and “administration” in business services, such as insurance. Further, the administrative exemption has traditionally applied to sophisticated service providers like loan officers, investment bankers and management consultants, all of whom “produce” the services that are the essence of their enterprises and thus would be nonexempt under Harris. Yet these types of employees are often extremely well-paid, a world apart from the class of production workers whom the wage and hour laws were designed to protect. Harris calls into serious question the continued existence and scope of the administrative exemption in California. As a result, some employers in California, at least in the insurance business, may contemplate greener pastures, as the decision will only enhance California’s business-hostile reputation. Employers who have relied on well-established regulations and case law for decades will be forced to reassess the status of many thousands or even millions of employees in California who have been covered by the exemption, and could also face a flood of lawsuits by employees claiming misclassification. Meanwhile, employees who have enjoyed the benefits of being exempt will lose those benefits, and find themselves watching their office hallways in fear of the human resources specialist carrying stacks of time cards. It is likely that this decision will be appealed. We can only hope that the Supreme Court will seize the opportunity to reject the court of appeal’s reasoning and restore the long-understood meaning of the administrative exemption. If it doesn’t, that sound you hear across the state will be the clicking of newly installed time clocks next to office coffee pots and water coolers � along with the grumbling of countless previously exempt workers lamenting those lost shopping excursions. Laura J. Maechtlen and Jonathan D. Martin are both associates in Seyfarth Shaw’s San Francisco office. They practice employment law.

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