The insurance industry certainly has not been exempt from the skyrocketing number of Fair Labor Standards Act ("FLSA") cases being filed by employees around the country for unpaid overtime. The FLSA is the federal law governing, among other things, overtime issues, and recently undergoing what many believe to be some much-needed revisions. Recent court rulings addressing the exempt status of insurance agents and adjusters demonstrate the high stakes that can be involved in answering the question of whether or not an employee is exempt from the FLSA's overtime provisions.
A federal appellate court in Florida recently addressed the issue of whether or not insurance agents are exempt from overtime requirements. A group of Allstate "neighborhood office" agents filed suit seeking unpaid overtime wages. The agents were guaranteed a minimum level of compensation, but could be paid more depending upon the success of their sales. The agents also received an office expense allowance, but most agents' business expenses exceeded this allowance. After closely examining the two-pronged "short test" of the administrative exemption, the Court ultimately ruled that the agents were exempt from overtime requirements, but only after many twists and turns.
Allstate first argued that its neighborhood agents were independent contractors, not employees, and therefore not even subject to the FLSA's overtime requirements. The Court, however, did not rule on the merits of that argument and instead focused on administrative exemption.
In order to meet the "short test" of the administrative exemption, an employer must meet both a salary and duties test of the FLSA. To meet the salary test, the employer must prove that the employee is paid a minimum salary of $250 per week that is not subject to deductions based upon the quality or quantity of work. With respect to the duties test, the employer must establish that the employee: (1) performs office or non-manual work directly related to management policies or general business operations of the employer; (2) customarily and regularly exercises discretion and independent judgment; (3) regularly assists a proprietor or executive, or performs specialized work or executes special assignments under only general supervision; and 4) does not devote more than 20% of the workweek to activities other than those described above.
With respect to the salary basis test, the agents argued that they were not paid on a salary basis because their compensation fluctuated based upon the number of insurance policies sold and because their minimum monthly guarantee was subject to deduction for office expenses in excess of their allowance. The Court, however, held that as long as there is a non-deductible minimum, additional compensation on top of that minimum depending upon sales success is permissible. The Court also rejected their argument regarding the deduction of office expenses over their allowance, holding that the agents themselves decided how much, if any, above their allowance they wanted to spend and since the deductions were not based on the "quality or quantity" of work performed, the Court held that the salary basis test was met.
The agents were also unsuccessful with their argument that their duties did not fall within the administrative exemption. The agents argued that they were in the "production" side of the business, not the administrative side, and that they were unlike white collar employees who service a business by promoting sales. The Court noted that "sales" is not typically considered an administrative activity in the context of a retail or service establishment, but that the FLSA regulations themselves state that insurance companies are not considered retail or service establishments within the meaning of the FLSA.
Finally, the Court examined whether or not the agents exercised sufficient discretion and independent judgment to meet the duties test of the administrative exemption. The agents argued that because Allstate "closely regulated" the products they sold, how they sold them and the manner in which they provided customer service, that they did not exercise sufficient discretion and independent judgment to be considered exempt. The Court disagreed, stating that oversight does not necessarily mean that a worker is not required to use discretion and independent judgment.
The ruling undoubtedly was a great relief to Allstate, who could have conceivably faced liability for unpaid overtime for up to 2,300 of its 6,500 agents who opted to join into the class action lawsuit.
Farmers Insurance Exchange did not fare as well with respect to its insurance adjusters. A federal court in Oregon recently held that some of Farmers' insurance adjusters and claims representatives are exempt under the administrative exemption, but others are not. The Court focused on the employee's "ability to compare, evaluate and choose between possible courses of conduct" and whether they have the power "to make an independent choice, free from immediate supervision and with respect to matters of significance." In that regard, adjusters who handled uncomplicated and routine losses of less than $3,000 and who relied on computer software to estimate damages were not held to be exempt while adjusters who addressed more complicated claims involving credibility of witness determinations and complex coverage issues were considered exempt from overtime.
The Farmers decision points out that job titles alone are not determinative in and of themselves of exempt status. But most significantly, the Farmers decision demonstrates the high stakes involved in overtime litigation. Some of Farmers' misclassifications were held to be "willful" since Farmers was placed on notice of potential FLSA violations by prior litigation. A "willful" determination extends an employer's potential liability for unpaid overtime from two years to three years and also allows the imposition of significant penalties.