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Class Action Defense Cases-In re Farmers Insurance Exchange: Ninth Circuit Rejects “$3,000 Rule” Created By District Court In FLSA Class Action

In Class Action Alleging Violations of Federal Fair Labor Standards Act (FLSA), $3,000 Rule Crafted by District Court as Exception to Overtime Pay Lacked Support in Record and was Unworkable in Practice Ninth Circuit Holds

Plaintiffs, former and current insurance claims adjusters for Farmers Insurance Exchange, filed a class action against their employer alleging that they were misclassified as exempt employees and denied overtime pay in violation of the federal Fair Labor Standards Act (FLSA). In re Farmers Ins. Exch., Claims Representatives’ Overtime Pay Litig., 481 F.3d 1119, 1124 (9th Cir. 2007). The district court established a “$3,000 in claims paid per month” rule and, applying that test, concluded that some of the claims adjusters were exempt but others were not. Id. Before the Ninth Circuit, all parties agreed that the district court’s $3,000 rule “is neither workable nor supported by the evidence.” Id. The Circuit Court agreed, holding that “all of the adjusters in this case are exempt,” id. The Ninth Circuit stated that “For more than 50 years, the Department of Labor has considered claims adjusters exempt from the Fair Labor Standard Act’s overtime requirement.” Id.

For purposes of this article, we address solely the “$3,000 rule” creatively crafted by the district court. On this point, the Ninth Circuit concluded that the district court’s rule not only “lack[ed] support in the record,” but is “simply unworkable in practice.” In re Farmers, at 1132. The Circuit Court explained at page 1132,

As FIE points out, many states require employers to pay wages, including overtime, to nonexempt employees more frequently than once a month. Under the $3,000 rule, FIE would not know whether a particular employee is due overtime until months or years down the road when the claim is finally resolved, because only then would FIE be able to calculate the average value of the claims on the adjuster’s desk during any given pay period. And from pay period to pay period, an adjuster’s status could change from exempt to nonexempt, even though his core duties stayed the same. Thus, to ensure it complied with payroll laws, FIE would have to track the daily activities of each adjuster, creating a significant administrative burden while denying it the flexibility the short test promises. [Citation.] Even more problematic is the fact that the $3,000 rule runs afoul of public policy: an adjuster’s right to overtime is tied to his ability to keep low his settlements with insured parties.

The Ninth Circuit concluded, “Moreover, § 541.203 says that adjusters are exempt if they, like the adjusters in this case, determine coverage and liability, prepare estimates and negotiate settlements. Nothing in the regulation suggests that ‘smaller’ claims-however that term would be defined-should be treated differently. If the DOL changes its view, it is, of course, free to amend the regulations.” In re Farmers, at 1132-33.

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