While large insurance companies reportedly have paid over $100 million each to settle overtime claims brought by claims adjusters, insurance brokerage giant Aon rolled the dice and won a significant trial victory last week. Aon prevailed in an eleven-day trial against a certified class of 1,024 current and former claims adjusters employed by Aon’s wholly-owned subsidiary, Cambridge Integrated Services, Inc. As in most of these cases brought by claims adjusters, Aon’s adjusters sought overtime pay, and Aon successfully relied upon the administrative exemption to justify its failure to pay overtime in a bench trial before retired judge Ronald Sabraw. Since the California Court of Appeal previously rejected the applicability of the administrative exemption to insurance claims adjusters in Bell v. Farmers Ins. Exch. (2001) 87 Cal.App.4th 805, Aon’s adjusters here might have expected a cake walk. But little went their way this time.

Aon had four significant hurdles to overcome to avoid liability. To prove the adjusters were correctly classified exempt, Aon had to prove that: (1) the claims adjusters’ duties involved the performance of office or non-manual work directly related to management policies or general business operations of Aon or its customers; (2) the claims adjusters customarily and regularly exercised discretion and independent judgment; (3) the claims adjusters performed under only general supervision work requiring special training, experience or knowledge; and (4) the adjusters spend at least 50 percent of their time performing these exempt duties. Aon cleared every one of these hurdles.

The court accepted Aon’s argument that the duties described in its claims adjuster job description qualify as exempt work. The court emphasized that there was no indication in the job description that these significant activities were closely supervised and these activities “entail[] specialized training, experience and knowledge.”

A job description may—or may not—accurately describe the work performed by any group of persons covered by that job description. But Aon succeeded in showing—based primarily on testimony of the class representatives themselves—that the work actually performed by the adjusters also constituted non-manual office work “directly related to the general business operations” of Aon/Cambridge and its customers. Of significance to the court were the class representatives’ admission that their decisions whether to accept a workers’ compensation claim directly affected the amount of money expended by their clients. Moreover, the adjuster’s responsibility to set reserves for each claim required clients to set aside cash to cover these potential liabilities, and in the aggregate, claims adjusters established reserves as high as $50 million dollars. The failure to set adequate reserves properly can have dire consequences for clients, including causing insolvency and even bankruptcy. The court rejected plaintiffs’ contention that this reserve-setting process did not fulfill a critical role for clients in discharging the client’s obligation to comply with the state workers’ compensation laws.

The court also found that the adjusters “customarily and regularly” exercised discretion and independent judgment in handling workers compensation and other liability claims. The “relative uniformity” of the testimony in describing the spectrum of issues impressed the court. While the adjusters argued that the company’s “best practices manual” curtailed their exercise of independent judgment or discretion, Judge Sabraw agreed with Aon that the manual was merely a “guideline” or “resource” for adjusters, not “a rigid template for how to handle every claim.”

Plaintiffs’ argument that these adjusters were analogous to non-exempt “inspectors” did not carry the day either. The court found that adjusting workers’ compensation claims requires far more discretion than that exercised by inspectors, noting that one class member admitted that 75 to 80 percent of her daily decisions were made without supervision, another plaintiff conceded that the process “is not rote work,” and a third noted that different claims adjusters can reach different conclusions evaluating the same medical evidence.

Although the adjusters showed they were required to obtain supervisor approval for certain decisions such as denying a claim or setting a reserve above the adjuster’s authority level, the court next determined that the adjuster operated under only general supervision. Critical to the court’s decision was its conclusion that adjusters were largely unsupervised and free to work independently. Once again, key admissions from plaintiffs themselves were critical to Aon’s success, such as one adjuster’s observation that, “I don’t need someone looking over my shoulder for me to get my job done.” Further, adjusters needed specialized education because each must pass a state-mandated certification test, obtain continuing education credits, and stay current with changes in the laws impacting workers’ compensation coverage.

Finally, to qualify as exempt, Aon/Cambridge had to prove that the adjusters spent more than one-half of their work time engaged in exempt duties. According to Judge Sabraw, little evidence was offered at trial to show that class members spent anything approaching less than half of their time performing the exempt duties outlined in the company’s job description. The class representatives themselves admitted to performing exempt duties as often as 100 percent of the time.

Since there was no dispute that the adjusters were paid well above twice the minimum wage, the court concluded that the class as a whole met each of the criteria for the administrative exemption, and that Cambridge did not violate minimum wage laws, nor engage in any unlawful or unfair conduct proscribed by Business and Professions Code section 17200.

Interestingly, the court nevertheless provided its analysis of plaintiffs’ request for the equitable remedy of restitution, apparently to avoid a retrial should plaintiffs overturn the judgment on appeal. If the plaintiffs were to prevail on the issue of exempt status, then the court found the statistical evidence offered by competing experts sufficient to award lost overtime of 4.35 hours per week to the class. Sorting through the evidence based on depositions of 187 class members, the court found more reliable the testimony of current as opposed to former adjusters, noting that former adjusters reported nearly twice the weekly overtime as current adjusters (8.23 hours compared to 4.35 hours). The court commented that the farther back in time the adjuster was asked to estimate the amount of overtime worked, the higher the overtime hours reported. The court thus opined that if the plaintiffs were to prevail on liability, the court would accept the average of 4.35 overtime hours per week in order to calculate lost overtime, albeit calibrated to reflect different pay rates at different times.

Aon’s victory comes after a long legal battle. The first trial before a jury in 2005 resulted in a mistrial. Plaintiffs already have announced their intention to appeal Judge Sabraw’s decision. Whatever the final outcome, this case illustrates that insurance companies and other employers can establish the applicability of California’s administrative exemption, even when employees receive general guidance from manuals and supervisors.

Alison Hightower authored this blog entry.