Insurance Fraud Investigators Not Exempt Under FLSA Administrative Exemption: Fourth Circuit | Practical Law

Insurance Fraud Investigators Not Exempt Under FLSA Administrative Exemption: Fourth Circuit | Practical Law

In Calderon v. GEICO General Insurance Company, the US Court of Appeals for the Fourth Circuit held that insurance fraud investigators are not exempt under the Fair Labor Standards Act (FLSA).

Insurance Fraud Investigators Not Exempt Under FLSA Administrative Exemption: Fourth Circuit

by Practical Law Labor & Employment
Published on 05 Jan 2016 • USA (National/Federal)
In Calderon v. GEICO General Insurance Company, the US Court of Appeals for the Fourth Circuit held that insurance fraud investigators are not exempt under the Fair Labor Standards Act (FLSA).
On December 23, 2015, in Calderon v. GEICO General Insurance Company, the US Court of Appeals for the Fourth Circuit held that GEICO misclassified its insurance fraud investigators, and that they were not exempt under the FLSA's administrative exemption. The court found that the investigators' primary duty of investigating potential fraudulent claims was not directly related to the insurance company employer’s management or general business operations to meet the criteria for the administrative exemption. ( (4th Cir. Dec. 23, 2015).)

Background

GEICO employs security investigators (investigators) in its claims department. GEICO classifies the investigators as exempt from overtime under the FLSA.
The investigators are primarily responsible for investigating suspected fraudulent claims. This function represents approximately 90% of their job duties. Typically, investigations are referred to the investigators by other employees in the claims department. The investigator:
  • Creates an initial plan of action detailing the steps to investigate the case and enters the plan into GEICO's database.
  • Submits:
    • an initial report within 30 days of receiving the referral on the case; and
    • interim reports every 20 days during the investigation.
  • Thoroughly investigates the claim.
  • Identifies, interviews (including sometimes under oath), and evaluates the credibility of potential witnesses who may have information about the claim.
  • Takes photographs related to the investigation and, when applicable, conducts property inspections.
  • Preserves documents and other evidence.
  • Writes a complete final summary report that is submitted to the investigator's supervisor, outlining:
    • the investigation's main findings regarding the suspected insurance fraud; and
    • the basis for those findings.
  • Has discretion to refer the claim to:
    • the National Insurance Crime Bureau or other state agencies if the investigator has found significant indications of fraud; and
    • GEICO's underwriting department so that the insured's rates may be adjusted when the insured's policy comes up for review.
    • GEICO:
  • Has investigation procedures for investigators to follow, but investigators use their judgment at all stages of the investigation, including drawing inferences from the evidence they find.
  • Does not permit investigators to speculate in their reports.
  • Requires that investigators substantiate any conclusions in their reports with facts and evidence.
GEICO internally reviewed the investigator position both in 2004 and 2007, concluding each time that the position should be classified as exempt. In 2010, a GEICO investigator, Samuel Calderon, brought a collective action in US district court on behalf of himself and other current and former investigators alleging that the investigator position was non-exempt and that they were due unpaid overtime.
The district court granted summary judgment to the investigators on their overtime claim, finding that their primary duties do not sufficiently involve exercising discretion and independent judgment on matters of significance to GEICO. GEICO appealed to the Fourth Circuit.

Outcome

The Fourth Circuit:
  • Affirmed the district court's decision that the investigators were due overtime pay.
  • Held that:
    • GEICO's investigators are non-exempt under the FLSA; and
    • their duties do not meet the FLSA's administrative exemption because they are not directly related to the employer's management or general business operations.
The Fourth Circuit noted that:
The Fourth Circuit found that the investigators do not satisfy the administrative exemption's directly related requirement because:
  • Their duties:
    • are not connected closely enough with GEICO's management or general business operations; and
    • do not involve developing, reviewing, evaluating, or recommending to GEICO business polices or strategies related to the claims they investigate.
  • The investigators have no role in managing, running, or servicing GEICO's general business operations.
  • DOL regulations specifically indicate that conducting factual investigations, even on significant matters for the employer, does not satisfy the directly related component of the administrative exemption (see 29 C.F.R. § 541.3(b)(1); 29 C.F.R. § 541.3(b)(3); 29 C.F.R. § 541.203(j)).
The court also found that:
  • Although a DOL regulation provides that insurance claims adjusters generally meet the administrative exemption, the regulation is not useful for evaluating the investigators in this case. Insurance claims adjusters perform a broader set of duties than the investigators, including:
    • negotiating settlements; and
    • making litigation recommendations.
  • The use of the investigators' work for claims adjustment purposes did not satisfy the administrative exemption because:
    • if it did, then even lower-level administrative positions like secretaries in a claims adjustment department would be exempt; and
    • the exemption depends on what an employee's primary duty involves, not its ultimate purpose or use.

Practical Implications

Employers should examine any positions they have similar to GEICO's insurance fraud investigators that they are treating as exempt to determine whether they may be misclassified. For more information, see: