Adjuster Overtime Compensation Causes Consternation for Insurers

The issue of whether insurers must compensate claims adjusters on a salary basis without overtime pay has been the subject of class action litigation and considerable concern among insurance company management.

Most of the litigation has been filed in California, where the state laws concerning overtime pay are stricter than the federal law. On July 11, 2001, in Bell v. Farmers Insurance Exchange, a jury awarded a class of 2,402 Farmers Insurance automobile and homeowners adjusters a total of $90 million in overtime pay. The award was the largest ever in California in a claim for overtime pay, and created shockwaves through insurers equal to the largest temblor.

Until Bell, it was generally believed that overtime pay is not required for adjusters because they are classified as “management” or “professional” personnel under the federal Fair Labor Standards Act (FLSA).

This law requires employers to pay overtime wages for hours worked in excess of 40 per week. However, some types of employees are specifically exempted from this requirement. Exempted employees are executives and managers, professionals, administrative personnel, outside sales personnel and commissioned sales personnel. The insurance industry has traditionally considered claims adjusters to be administrative employees. To qualify as an exempt administrative employee under the regulations currently in effect, an individual would have to make at least $155 per week, as well as meet other criteria.

Current federal regulations require that an administrative employee in a service industry do the following to be exempt from overtime compensation:

·Regularly exercise discretion and independent judgment;
·Regularly and directly assist other employees perform specialized or technical work requiring special training, experience or knowledge under only general supervision, or perform special tasks and assignments under only general supervision; and
·Devote no more than 40 percent of work hours to activities that are not directly and closely related to the performance of exempt work.

In 2000, however, the California state legislature passed a law making it easier for employees, especially managers, to file for overtime pay.

As a result of this legislation and the Bell decision, hundreds of overtime lawsuits have been filed against more than 160 companies, primarily in California, against employers in insurance and other industries. The litigation has already cost companies hundreds of millions of dollars in settlements. The issue of whether insurance adjusters use discretion and independent judgment has been the source of most class action litigation.

In an attempt to place an administrative fix on this litigation problem, the Department of Labor issued a proposed update March 31, 2003, intended to clarify and simplify how employers determine who is exempt from overtime pay requirements under the FLSA. The proposed federal regulations specifically exempt executives, professional employees, administrative employees, IT workers and outside sales persons.

The new regulations would change the exemption by replacing “discretion and independent judgment” with a requirement that an employee hold a “position of responsibility.” The regulation defines the phrase as, “…the importance to the employer of the work performed. To meet this requirement, an employee must either customarily and regularly perform work of substantial importance or perform work requiring a high level of skill or training.”

Work of substantial importance is defined as, “…work that, by its nature or consequence, affects the employer’s general business operations or finances to a significant degree.”

The proposed regulations specifically mention claims adjusters under Section 541.203 (b)(2), stating the following:

“Insurance claims adjusters also generally perform work of substantial importance, 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 claim; determining liability and total value of a claim; negotiating settlements; and making recommendations regarding litigation.”

The decisions made by adjusters have a significant financial impact on insurance operations.

On a daily basis, they make important determinations of whether or not to pay claims. There is an enormous amount of training and licensing that an adjuster needs before insurers set adjusters to work making these decisions.

The proposed regulations seem to be a step in the right direction to clarify the uncertainty with federal exemption requirements, which should in turn reduce the number of lawsuits.

Kirk Hansen is director of claims for the Alliance of American Insurers, Downers Grove, Ill. To comment on this article, e-mail: dthomas@insurancejournal.com