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Claims Adjusters Keep Overtime Exemption under New DOL Regulations
By Lisa L. Burke
June 2004
*This article also appeared, in substantially the same form, in the October 2004 edition of Claims Magazine."
Insurance claims adjusters are still exempt from federal overtime requirements under the United States' Department of Labor, Wage and Hour Division's final version of the controversial changes to the white collar exemption regulations. As requested by the American Association of Independent Claims Professionals (AAICP), an association of independent claims adjusting companies, the Labor Department specifically noted in the new regulations that claims adjusters are generally exempt from overtime pay requirements regardless of what kind of company they may work for – an insurance company or an independent. The new regulations also make some adjustments to exempt salary requirements that may affect claims adjusters, including raising the minimum exempt salary and creating a new pseudo-presumption of exempt status for higher wage-earners.
Since its inception, the federal Fair Labor Standards Act (FLSA) exempted most insurance claims adjusters from federal overtime pay requirements. Not only did the regulations implementing the FLSA specifically mention insurance claims adjusters, but the Department of Labor, Wage and Hour Division issued opinion letters to independent claims adjusting companies confirming that traditional claims adjusting duties meet the requirements of the administrative exemption. Nonetheless, in recent years insurance and independent claims adjusting companies have been plagued by expensive litigation challenging the exempt status of claims adjusters.
The AAICP is an association of independent claims adjusting services companies that provide claims adjusting services for organizations such as insurance companies, self-insured corporations and entities and federal, state and local government agencies. The organization, formed in 2002, is dedicated to promoting and improving independent claims adjusting services generally and to addressing the interests of its independent member companies that provide these services. As part of its mission, the AAICP met with Tammy McCutcheon, Administrator of the Wage and Hour Division, to introduce her to the independent claims adjusting industry and to explain the industry's troubled experience with the FLSA. On behalf of its members, the association then submitted comments to the Administrator regarding the proposed changes to the white collar exemption regulations. These comments encouraged the Administrator to make even clearer in the new regulations that independent claims adjusters, and claims adjusters generally, are exempt administrative employees.
Insurance Claims Adjusters are Clear Examples of Exempt Employees
Federal wage and hour law recognizes three “white-collar” exemptions: professional, administrative and executive employees. Most claims adjusters have traditionally been exempt administrative employees, although some specialized adjusters have and still may qualify under the professional exemption as well. The new regulations define an administrative employee as one:
• Whose primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers; and
• Whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. The exercise of discretion and independent judgment “involves the comparison and the evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered.” The term “matters of significance” refers to the level of importance or consequence of the work performed. The regulation also provides factors to consider when determining whether an employee meets the duties test for this exemption.
As requested by the AAICP, the new regulations specifically use insurance claims adjusters as an example of an exempt administrative employee:
Insurance claims adjusters generally meet the duties requirements for the administrative exemption, whether they work for an insurance company or other type of company , if their duties include activities such as interviewing insureds, witnesses and physicians; inspecting property damage; reviewing factual information to prepare damage estimates; evaluating and making recommendations regarding coverage of claims; determining liability and total value of a claim; negotiating settlements; and making recommendations regarding litigation. The example makes clear that independent claims adjusters are exempt, even when they work for a company that is in the business of providing claims adjusting services. This provision is consistent with the Labor Department's former regulations, addressing administrative services companies, and the Department's long-held view of independent claims adjusters. This express example in the regulations will make future litigation regarding the status of employees who perform the role of traditional claims adjusters frivolous and unnecessary. As the DOL explains in the supplementary information to the new regulations, employers may not rely on the “Claims Adjuster” job title alone. As with any other position, an employer must make a case-by-case assessment to determine whether the employee's duties meet the requirement for exemption. Most claims adjusters meet these requirements, but employers must carefully review the duties of those employees with claims adjuster titles to ensure that they perform the duties contemplated by the regulations.
DOL Simplified the Salaried Basis Test
To be exempt from overtime requireents, a white collar employee must not only perform the duties required by the regulations, but must also meet the regulatory “salary basis test.” Generally, with a few exceptions, exempt employees must be paid their full salaries, not subject to deduction based on the quality or quantity of work performed, in any week in which they perform work. In the new regulations, DOL made significant changes to the salary basis test and its exceptions.
• Increase in Salary Level Qualifications, 29 C.F.R. § 541.600.
The revised regulations change the exempt salary minimum threshold from the prior two levels, $155 per week or $250 per week, to a single $455 per week requirement. Employees who are paid a salary that is lower than this threshold must also be paid overtime. This minimum applies to executive, administrative and professional employees, but not outside sales people.
• New Highly Compensated Test, 29 C.F.R. § 541.601.
The revised regulations add a new “highly compensated” test. Under this test, an employee will be exempt if he or she performs office or non-manual work, is guaranteed compensation of at least $100,000 per year, and customarily and regularly performs at least one of the exempt duties listed for executive, administrative or professional employees. This greatly simplifies that exemption analysis for highly compensated employees.
• Expanded Deductions under the Salaried Basis Test, 29 C.F.R. § 541.602(b)(5)
The revised regulations allow employers to make full-day deductions from an exempt employee's salary for disciplinary infractions, without risking loss of exempt status. Previously this was only allowed when the discipline was for a violation of a major safety rule, like smoking on an oil rig. Now such deductions would be allowed for full day suspensions for violations of written workplace conduct rules that apply uniformly to all employees. Specifically, the new regulation states:
Deductions from pay of exempt employees may be made for unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules. Such suspensions must be imposed pursuant to a written policy applicable to all employees.
Many employers will be reviewing their written rules to insure that serious infractions that could result in suspension without pay are express.
• Broader “Window of Correction” for Salary Errors, 29 C.F.R. § 541.603(a) and (b)
The new regulations make it easier for an employer to correct errors made in salary deductions. An employer will only lose the exemption for making improper deductions if the employer has an “actual practice” of making improper deductions. The new regulation lists the following factors to consider in determining whether an employer has such an actual practice:
• The number of improper deductions, particularly as compared to the number of employee infractions warranting discipline;
• The time period during which the employer made improper deductions;
• The number and geographic location of employees whose salary was improperly reduced;
• The number and geographic location of managers responsible for taking the improper deductions; and
• Whether the employer has a clearly communicated policy permitting or prohibiting improper deductions.
If the employer has an actual practice of making improper deductions, the exemption will only be lost for the time period in which the improper deductions were made for employees in the same job classifications working for the same managers responsible for the improper deduction.
• New “ Safe Harbor ” for Salary Errors, 29 C.F.R. § 541.603(c) and (d)
The revised regulations provide new “safe harbors.” An employer will not lose an exemption due to improper salary deductions that are either isolated or inadvertent, as long as the employer reimburses the employee for such deductions. Furthermore, an employer will not lose an exemption due to improper salary deductions if the employer (1) has a clearly communicated policy prohibiting improper pay deductions and includes a complaint mechanism; and (2) reimburses employees for any improper deductions and makes a good faith commitment to comply in the future. An employer will lose the exemption, however, for willful violations of the policy or for continuing deductions after employee complaints.
• Exempt Salary Flexibility, 29 C.F.R. § 541.604 and 605
Under the new regulations, an employer may compute an exempt employee's salary on an hourly, daily or shift basis, if the employment arrangement also includes a guarantee of the minimum weekly required amount paid on a salary basis regardless of the number of hours, days or shifts worked and a reasonable relationship exists between the guaranteed amount and the amount actually earned. The new regulations also make explicit DOL's long-held opinion that hourly overtime payments to exempt employees on any basis are allowed. Also, the regulations explain how administrative and professional employees may be paid on a fee basis, rather than a salary basis.
While the new regulations implement many changes designed to make the FLSA easier to comply with and understand, many other proposed changes were omitted from the final regulations after public comment and much political bantering. Nonetheless, the new regulations are the most significant change in years to a law that many believe is long overdue for modernization. Fortunately for the insurance claims adjusting industry, the proposed changes specific to claims adjusters, aggressively lobbied for by the AAICP, made the final cut.
Lisa Burke was a partner at Patton Boggs LLP in Washington, DC.
29 C.F.R. § 541.200 – 207.
§ 541.203(a) (emphasis added).
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