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Employers faced with class and collective actions alleging their employees are improperly classified as exempt from overtime pay requirements must grapple with a difficult decision: to aggressively defend the action or settle it. All too often, employers expend considerable time and money only to settle on unfavorable terms. While in some circumstances settlement is appropriate, employers should not fear trial and must carefully evaluate claims to determine if a winning defense exists. Despite frequent news reports of settlement after settlement of overtime exemption actions, employers can win such cases. One recent example of an employer prevailing in a wage and hour suit is the Ninth Circuit's decision in In re: Farmers Insurance Exchange, Claims Representatives' Overtime Pay Litigation, No. 05-35080 (9th Circuit October 26, 2006).

Under the Fair Labor Standards Act and comparable state laws, employers are required to pay overtime wages unless their employees are exempt from overtime requirements under regulations issued by the United States Department of Labor and similar state agencies. The determination of whether an employee is exempt often involves a fact-based analysis of the employee's job duties and responsibilities. It is this factual determination and the ability of an employer to present the relevant facts in an accurate and favorable light that provides the employer the opportunity to defeat wage claims. 

In Farmers Insurance, nearly 2,000 current and former insurance claims adjusters from Colorado, Illinois, Michigan, Minnesota, New Mexico, Oregon and Washington, sued their employer, Farmers Insurance Exchange ("FIE"), alleging that the company improperly classified them as exempt from federal and state overtime requirements. Separate actions filed in each of the above states were consolidated and transferred for pre-trial proceedings to the United States District Court for the District of Oregon. At the conclusion of pre-trial proceedings, the parties stipulated to a consolidated trial in that court. During a three-week bench trial solely concerning whether the claims adjusters were exempt, the parties presented live testimony, video-taped deposition excerpts, internal reports and other evidence upon which the district court relied to make more than sixty separate findings of fact. These findings ranged from the general business operation of FIE to the individual training, job requirements, duties, responsibilities, practices, and authority of claims adjusters. At the conclusion of the trial, the district court found that certain adjusters were exempt, certain adjusters were non-exempt, and that other adjusters were non-exempt or exempt based upon whether they paid more than $3,000 in claims to insureds per month. 

On appeal to the Ninth Circuit, both parties agreed that distinguishing between exempt and non-exempt workers based on whether they paid more than $3,000 in claims per month was unworkable. The Ninth Circuit rejected this $3,000 test and held that all of FIE's claims adjusters are exempt from federal overtime requirements. In doing so, the Ninth Circuit found that claims adjusters' duties "almost track[ed] word for word the language in" the Department of Labor's regulations, which set forth specific criteria to guide the determination as to when insurance claims adjusters should be classified as exempt employees. The court explained that all of FIE's adjusters were exempt because, among other reasons, they regularly exercised discretion and independent judgment in determining whether to pay a claim regardless of the size of the claim. In so ruling, the Ninth Circuit rejected the argument that adjusters were non-exempt because they used computer software to estimate the value of claims. Further, the court ruled that the $3,000 test was unworkable because it would delay determination of whether a particular employee is due overtime until the claim was actually paid, which could be months after the claim was assessed. The Ninth Circuit reasoned that under the $3,000 test the exempt status of an employee could change from month to month and that the test would create an administrative burden that was nearly impossible to implement.

FIE ultimately prevailed in the Ninth Circuit because it proceeded to trial in the district court and was able to establish favorable factual findings on the record. The Ninth Circuit relied on these factual findings in rejecting the district court's $3,000 test and reversing the district court's decision to the extent that it found that certain adjusters were not exempt from federal overtime regulations.

Farmers Insurance demonstrates that through good lawyering and appropriate risk taking, employers can achieve favorable results with a successful trial. 

The White & Case California Litigation Report is prepared for the general information of our clients and other interested persons. It should not be acted upon in any specific situation without appropriate legal advice.

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