An Irritable Pessimist’s View of a Welcome Decision

After several years of waiting, the California Supreme Court handed down its long-anticipated decision in Harris v. Superior Court last week. Given the natural-born suspicion held by management-side lawyers toward anything that wanders its way out of the wilderness that is the California courts, it probably comes as no surprise that we’re left a bit underwhelmed. In fact, we’re left feeling much like a patient immediately following successful brain surgery; sure, we’ve obtained the best possible outcome for which we should probably be thankful, but it feels like we just had our collective skull drilled and cut open only to get a result that might eventually develop into normalcy.

The primary issue in Harris was the degree to which the so-called “administrative/production dichotomy” is controlling in applying California’s administrative exemption. Under California Wage Order 4-2001, the first element of the administrative exemption restricts its application to employees who perform work “directly related to management policies or general business operations of [an employee’s] employer or his/her employer‘s customers.” When applied in isolation without reference to other analytical tools, the administrative/production dichotomy interprets this provision to exclude any employee involved in producing or providing the goods and/or services that the employer is in business to provide (i.e., “production employees”). As illustrated by Bell v. Farmers Ins. Exchange, 87 Cal.App.4th 805 (2001), some California courts further restricted the “administrative” side of the dichotomy to include only those individuals who are actually involved in matters affecting the overall direction of the business and/or its policies.

In Harris, the appellate court held that Bell precluded the defendant employer from establishing a genuine issue of fact as to whether the plaintiff insurance adjusters were administratively exempt. While acknowledging that the adjusters’ work was not routine or unimportant (as was the case in Bell), the appellate court held that their work nonetheless was “not carried on at the level of policy or general operations, … [and therefore fell] on the production side of the dichotomy.”

The good news is that the California Supreme Court unequivocally rejected this mechanical application of the administrative/production dichotomy, a holding that is undeniably welcome news for California employers. The breadth of its opinion, however, is somewhat difficult to decipher. For example, in addressing the appellate court’s assertion that the administrative exemption is limited to employees who impact the overall business and/or its policies, the Court noted that the appellate court had conflated the proper analysis with a separate element of the exemption (i.e., that an employee’s work must be of “substantial importance to the management or operations of the business”). However, the Court stopped short of deciding whether such a requirement would be appropriate in the context of the “substantial importance” prong, and disclaimed any intention to do so. Moreover, the Court specifically denied any suggestion that the dichotomy was misapplied in Bell, and emphasized that its decision in Harris was limited to holding that the appellate court erred by treating the administrative/production dichotomy as dispositive based on the factual record of that case.

So, what does that mean for class certification? Well, we’d like to believe that it means a plaintiff’s lawyer can’t create a common legal question worthy of class certification just by claiming that the putative class members fall on the production side of the administrative/production dichotomy, or by claiming that they do not exercise discretion on matters of substantial importance or significance simply because they do not possess policy-making authority. There certainly is language in the Harris opinion to support this hope. The Harris Court, for example, found unpersuasive a prior case (Bratt v. County of Los Angeles, 912 F.2d 1066 (9th Cir. 1990)) in which the Ninth Circuit suggested that policy-making authority was a requirement for an employee to be treated as administratively exempt. The Harris Court further cautioned that application of the administrative exemption is fact-specific and that courts should not ignore the language of the FLSA regulations and California Wage Order in favor of a mechanical application of the administrative/production dichotomy.

But, after all, we’re talking about California here.

The Bottom Line: Harris is, at the very least, a welcome sign for employers, but there is some measure of ambiguity in its holding for the lower courts to explore.