Insurance investigators nonexempt, entitled to overtime

GEICO insurance claims investigators were nonexempt employees, entitled to overtime, the Fourth Circuit found, affirming judgment in the employees’ favor on their claims under the FLSA and New York Labor Law (NYLL). While the district court had concluded that GEICO failed to meet the “discretion and independent judgment” criteria for the administrative exemption to apply, the appeals court based its holding primarily on the fact that the investigators were, at bottom, engaged in the functional business of the company, rather than running its operations. Although “a very close legal question,” their primary duty was not directly related to management, the court found, and the exemption did not apply. Also, although it rejected a number of the plaintiffs’ assertions on cross-appeal, it did conclude the trial court erred in refusing to grant them prejudgment interest, remanding the case for entry of such an award under both federal and state law.

Nonexempt duties

The investigators work in GEICO’s Special Investigations Unit, part of GEICO’s claims department, spending about 90 percent of their time investigating potentially fraudulent insurance claims pursuant to specific company-mandated procedures. Investigators submit an initial report within 10 days of receiving a claim referral and then submit interim reports every 20 days during the investigation. All but about 40 or 50 out of 250 investigators must submit their reports to their supervisor for review before submitting them to GEICO’s claims management system. The claims adjusters generally do not review investigators’ reports once they are finalized, typically basing their decisions regarding whether to pay claims on oral reports or summaries of the reports that the investigators provide to them.

GEICO has long classified its investigators as exempt under the FLSA. In 2004, they revisited the question pursuant to the DOL’s revised white-collar rules as well as a federal court ruling finding the company’s auto damages adjusters were exempt. Nonetheless, the company determined the investigators were properly classified as exempt. GEICO reviewed this determination again in 2007 but held firm. The investigators filed suit in 2010, however, and a district court granted partial summary judgment as to liability, finding as a matter of law that the exemption did not apply. The Fourth Circuit affirmed, concluding their primary duty was not work directly related to the management or general business operations of the employer or its customers.

The investigators had no supervisory responsibility, did not develop business policies or strategies with regard to claims under investigation and, while their work is important, they were not part of management. In so holding, the appeals court deferred to DOL regulations explaining the “directly related” element, and opinion letters which supported its finding, indicating specifically that “employees whose primary duty is to conduct factual investigations do not satisfy the directly related element, even when the work is of significant importance to the employer.”

GEICO urged that the investigators were exempt because they performed some of the same duties that (exempt) claims adjusters performed. But the duties of the typical claims adjuster are “much broader” than those of the investigators under the regulations, and encompass some duties that are unmistakably administrative, such as “negotiating settlements” and “making recommendations regarding litigation.” The appeals court also rejected GEICO’s argument that the investigators were exempt by virtue of the fact that their duties support the claims-adjusting function and, as such, satisfy the “directly related” element. However, the appeals court stressed, it’s the nature of the work, “not its ultimate consequence,” that controls whether the exemption applies. “Were GEICO’s reasoning correct, even ‘run-of-the-mine’ jobs such as secretarial work that supported the claims-adjusting function could be found to be directly related to management policies or general business operations. But in fact such jobs do not generally satisfy this element,” the court noted.

Failed assertions on cross-appeal

For their part, the plaintiffs sought review of the lower court’s ruling in GEICO’s favor on the question of willfulness under the FLSA. They cited a memo prepared in 2004 by the head of the investigation unit, who had concluded the investigators were nonexempt based on a recent court decision. Ultimately, senior management disagreed; they believed the court ruling was incorrect, and ultimately, that decision was reversed on appeal. So the matter was hardly cut-and-dry. Moreover, GEICO considered the question again in 2007 and concluded the exemption was properly applied. Again, there was no evidence that the executives “made anything other than their best attempts to resolve this difficult exemption question,” and the ultimate decision was a reasonable (albeit incorrect) one.

The investigators also challenged the method used by the court below in calculating damages, arguing there was a genuine factual dispute as to whether they had agreed to receive straight-time pay for all hours worked in a given week. The appeals court observed that the investigators had worked under this assumption for many years without objection, so a jury would have no choice but to find such an agreement was in place.

Nor did the district court abuse its discretion by denying the investigators’ request for liquidated damages under the FLSA and NYLL. The district court correctly concluded that GEICO acted in good faith by reviewing the classification issue multiple times and that, given the closeness of the issue, the employer’s decision to treat the investigators as exempt was reasonable.

Prejudgment interest due

However, the investigators successfully argued that the lower court abused its discretion in declining to award prejudgment interest in the absence of an award of liquidated damages (on the basis that GEICO acted in good faith in treating them as exempt). While the FLSA does not explicitly provide for prejudgment interest, such an award is typically necessary in the FLSA context in order to make a plaintiff whole, the Fourth Circuit has previously noted. And, because prejudgment interest on an FLSA overtime claim is compensatory rather than punitive, the fact that the employer’s decision not to treat plaintiffs as exempt was reasonable or made in good faith does not mean prejudgment interest should be denied. Consequently, the appeals court reversed the district court on this point. Likewise, on their NYLL claims. Plaintiffs are entitled to prejudgment interest as a matter of right under the state statute, so the district court did not have discretion to deny an award. (Calderon v GEICO General Insurance Co., 4thCir, 166 LC ¶36,405.)

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