Insurance claim adjusters still are exempt from federal overtimerequirements, under the United States Department of Labor, Wage andHour Division's final version of the controversial changes to thewhite-collar exemption regulations.

As requested by the American Association of Independent ClaimsProfessionals (AAICP), an association of independent adjustingcompanies, the Labor Department specifically noted in the newregulations that claim adjusters generally are exempt from overtimepay requirements, regardless of what kind of company employs them,an insurance company or an independent. The new regulations alsomake some adjustments to exempt salary requirements that may affectclaim adjusters, including raising the minimum exempt salary andcreating a new pseudo-presumption of exempt status for higherwage-earners.

Since its inception, the federal Fair Labor Standards Actexempted most insurance claim adjusters from federal overtime payrequirements. Not only did the regulations implementing the FLSAspecifically mention insurance claim adjusters, but the Wage andHour Division issued opinion letters to independent adjustingcompanies confirming that traditional adjusting duties meet therequirements of the administrative exemption. Nonetheless, inrecent years, insurance and independent adjusting companies havebeen plagued by expensive litigation challenging the exempt statusof claim adjusters.

The AAICP met with Tammy McCutcheon, administrator of the Wageand Hour Division, to introduce her to the independent adjustingindustry and to explain the industry's experience with the FLSA. Onbehalf of its members, the association submitted comments toMcCutcheon regarding the proposed changes to the white-collarexemption regulations. These comments encouraged her to make evenclearer in the new regulations that independent claim adjusters,and claim adjusters generally, are exempt administrativeemployees.

Clear Examples

Federal wage and hour law recognizes three white-collarexemptions: professional, administrative, and executive employees.Traditionally, most claim adjusters have been exempt administrativeemployees, although some specialized adjusters have qualified, andstill may do so, under the professional exemption.

The new regulations define an administrative employee as onewhose primary duty is the performance of office or non-manual workdirectly related to the management or general business operationsof the employer or the employer's customers, and whose primary dutyincludes the exercise of discretion and independent judgment withrespect to matters of significance.

The exercise of discretion and independent judgment “involvesthe comparison and the evaluation of possible courses of conduct,and acting or making a decision after the various possibilitieshave been considered.” The term, “matters of significance,” refersto the level of importance or consequence of the work performed.The regulation also provides factors to consider when determiningwhether employees meet the duty test for this exemption.

The new regulations specifically use insurance claim adjustersas an example of an exempt administrative employee. Claim adjustersgenerally meet the duty requirements for the administrativeexemption, whether they work for insurance companies or other typesof companies, if their duties include activities such asinterviewing insureds, witnesses, and physicians; inspectingproperty damage; reviewing factual information to prepare damageestimates; evaluating and making recommendations regarding coverageof claims; determining liability and total values of claims;negotiating settlements; and making recommendations regardinglitigation.

The example makes clear that independent claim adjusters areexempt, even when they work for companies that are in the businessof providing claim adjusting services. This provision is consistentwith the Labor Department's former regulations addressingadministrative service companies, and the department's long-heldview of independent adjusters. This express example in theregulations will make future litigation regarding the status ofemployees who perform the role of traditional claim adjustersfrivolous and unnecessary.

As the DOL explains in the supplementary information to the newregulations, employers may not rely on the claim adjuster job titlealone. As with any other position, an employer must make acase-by-case assessment to determine whether the employee's dutiesmeet the requirement for exemption. Most adjusters meet theserequirements, but employers must carefully review the duties ofthose employees with claim adjuster titles to ensure that theyperform the duties contemplated by the regulations.

Simplified Salaried Basis Test

To be exempt from overtime requirements, a white-collar employeemust not only perform the duties required by the regulations, butmust meet the regulatory salary basis test. Generally, with a fewexceptions, exempt employees must be paid their full salaries, notsubject to deduction based on the quality or quantity of workperformed, in any week in which they perform work. In the newregulations, DOL made significant changes to the salary basis testand its exceptions.

Increase in Salary Level Qualifications, 29 C.F.R. ? 541.600.The revised regulations change the exempt salary minimum thresholdfrom the prior two levels, $155 per week or $250 per week, to asingle $455 per week requirement. Employees who are paid salarieslower than this threshold also must be paid overtime. This minimumapplies to executive, administrative, and professional employees,but not outside sales people.

New Highly Compensated Test, 29 C.F.R. ? 541.601. Under thistest, an employee will be exempt if he performs office ornon-manual work, is guaranteed compensation of at least $100,000per year, and customarily and regularly performs at least one ofthe exempt duties listed for executive, administrative, orprofessional employees. This greatly simplifies the exemptionanalysis 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 makefull-day deductions from an exempt employee's salary fordisciplinary infractions, without risking loss of exempt status.Previously, this was allowed only when the discipline was for aviolation of a major safety rule, such as smoking on an oil rig.Now, such deductions would be allowed for full-day suspensions forviolations of written workplace conduct rules that apply uniformlyto all employees. Specifically, the new regulation states:

Deductions from pay of exempt employees may be made for unpaiddisciplinary suspensions of one or more full days imposed in goodfaith for infractions of workplace conduct rules. Such suspensionsmust be imposed pursuant to a written policy applicable to allemployees.

Many employers will be reviewing their written rules to insurethat serious infractions that could result in suspension withoutpay are explicit.

Broader Window of Correction for Salary Errors, 29 C.F.R. ?541.603(a) and (b). The new regulations make it easier for anemployer to correct errors made in salary deductions. An employerwill lose the exemption only for making improper deductions if theemployer has an actual practice of making improper deductions. Thenew regulation lists the following factors to consider indetermining whether an employer has such a practice:

oThe number of improper deductions, particularly as compared tothe number of employee infractions warranting discipline;

oThe time period during which the employer made improperdeductions;

oThe number and geographic location of employees whose salarieswere improperly reduced;

oThe number and geographic location of managers responsible fortaking the improper deductions; and

oWhether the employer has a clearly communicated policypermitting or prohibiting improper deductions.

If the employer has an actual practice of making improperdeductions, the exemption will be lost only for the time period inwhich the improper deductions were made for employees in the samejob classifications working for the same managers responsible forthe improper deductions.

New Safe Harbor for Salary Errors, 29 C.F.R. ? 541.603(c) and(d). The revised regulations provide new safe harbors. An employerwill not lose an exemption due to improper salary deductions thatare either isolated or inadvertent, as long as the employerreimburses the employee for such deductions. Furthermore, anemployer will not lose an exemption due to improper salarydeductions if the employer has a clearly communicated policyprohibiting improper pay deductions and includes a complaintmechanism, and reimburses employees for any improper deductions andmakes a good faith commitment to comply in the future. An employerwill lose the exemption, however, for willful violations of thepolicy or for continuing deductions after employee complaints.

Exempt Salary Flexibility, 29 C.F.R. ? 541.604 and 605. Underthe new regulations, an employer may compute an exempt employee'ssalary on an hourly, daily, or shift basis, if the employmentarrangement also includes a guarantee of the minimum weeklyrequired amount paid on a salary basis, regardless of the number ofhours, days, or shifts worked, and a reasonable relationship existsbetween the guaranteed amount and the amount actually earned. Thenew regulations also make explicit DOL's long-held opinion thathourly overtime payments to exempt employees on any basis areallowed. Also, the regulations explain how administrative andprofessional employees may be paid on a fee basis, rather than asalary basis.

Although the new regulations implement many changes designed tomake the FLSA easier to comply with and understand, many otherproposed changes were omitted from the final regulations afterpublic comment and much political bantering. Nonetheless, the newregulations are the most significant change in years to a law thatmany believe is long overdue for modernization. Fortunately for theinsurance claim adjusting industry, the proposed changes specificto claim adjusters, aggressively lobbied for by the AAICP, made thefinal cut.

Brian P. Hale is press relations manager at the law firm PattonBoggs, in Washington, D.C.