Insights

On March 24, 2010, the United States Department of Labor’s Wage and Hour Division (Division) issued Administrator’s Interpretation No. 2010-1, which discusses the application of the administrative exemption under the Fair Labor Standards Act (FLSA) to mortgage loan officers. The Interpretation clarifies the scope of the administrative exemption by withdrawing two prior Wage and Hour opinion letters, Opinion Letter FLSA 2006-31 (September 8, 2006) and Opinion Letter WL 1558764 (a February 16, 2001). The Interpretation reiterates that the administrative exemption does not apply to a mortgage loan officer whose primary job duty is to make sales.

The administrative exemption to the FLSA’s minimum wage and overtime requirements applies to employees who are “employed in a bona fide administrative capacity.” To determine whether an employee meets the exemption, the employee must satisfy a three prong test established by the Department of Labor’s regulations (Regulations). The test provides that:

• The employee must be compensated on a salary or fee basis as defined in the Regulations at a rate not less than $455 per week;
• The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
• The employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.

The Interpretation focuses on the second prong of the test and liberally cites an extensive body of case law that explains the dichotomy between the production side of a business, as work related to goods and services constituting the business, and the administrative side of a business, as work related to running the business. After listing the “typical” job duties of a mortgage loan officer, including, among others, receiving internal leads and contacting potential customers, attempting to match the customers’ needs with and explaining to customers the particular terms and the pros and cons of available loan products, and collecting customer financial information and documents for forwarding to an underwriter or loan processor, the Division determined that such duties are primarily sales activities, which, therefore, “fall squarely on the production side.”

The Interpretation supports its position, in part, by referring to employers’ defenses in litigation concerning the applicability of the “outside sales person exemption” to certain mortgage loan officers. Those employers concede that the primary duty of such mortgage loan officers is sales (for, among other reasons, the fact that the exemption is lost without that concession). Further, the Interpretation states certain factors that suggest that employers also consider “inside” mortgage loan officers as sales personnel, including that all or some component of a mortgage loan officer’s compensation is generally commissions based, that employers often train mortgage loan officers in sales techniques, and that a mortgage loan officer’s job performance is commonly evaluated on sales related metrics.

The Division then withdraws two prior Wage and Hour opinion letters that employers have relied heavily on in litigation to defend mortgage loan officer misclassification claims. Primarily, Opinion Letter FLSA 2006-31 concludes “that the mortgage loan officers described [in the Opinion] satisfy the duties requirements of the administrative exemption.” According to the Interpretation, this conclusion wrongly assumed that an “example provided in [the Regulations] creates an alternative standard for the administrative exemption for employees in the financial services industry.” The example states as follows:

Employees in the financial services industry generally meet the duties requirements for the administrative exemption if their duties include work such as collecting and analyzing information regarding the customer’s income, assets, investments or debts; determining which financial products best meet the customer’s needs and financial circumstances; advising the customer regarding the advantages and disadvantages of different financial products; and marketing, servicing or promoting the employer’s financial products. However, an employee whose primary duty is selling financial products does not qualify for the administrative exemption.

In rejecting the analysis in Opinion Letter FLSA 2006-31, the Division, citing relevant case law, states that: “work performed incidental to and in conjunction with the employee’s own sales or solicitations is considered exempt sales work.” Although the Interpretation does not change the proposition that the administrative exemption does not apply where the mortgage loan officer’s primary duty is sales, the Interpretation brings more of the mortgage loan officer’s job duties under the sale’s rubric, thus making it virtually futile to argue that the mortgage loan officer’s primary duty is not sales.

The Interpretation will undoubtedly affect certain employers; however, I would be remiss not to acknowledge that many employers were not tempted to re-classify mortgage loan officers after the release of Opinion Letter FLSA 2006-31. Many mortgage companies were concerned that the facts on which that analysis was based expanded the job duties of a mortgage loan officer beyond what they and, as they perceived it, the industry, recognized as “typical.” In particular, the facts arguably stretched the mortgage loan officers’ duties into the underwriting realm, which many mortgage companies were for good reason, including apprehension of ECOA discrimination claims, unwilling to allocate to a mortgage loan officer. Additionally, some mortgage companies were concerned that the facts, as well as any reliance on the regulatory example, would promote the mortgage loan officer to the position of an adviser, which, in turn, might create a fiduciary duty between creditor and debtor, where no such duty otherwise exists under the well-settled arm’s length principle.

In sum, given the extensive body of case law cited in the Interpretation, and the statement therein that “the Administrator is not aware of any court that has found that mortgage loan officers – working either inside or outside – have a primary duty other than sales,” the Interpretation (and its correspondent withdrawal of Opinion Letter FLSA 2006-31) will not catch employers—who have faced or who are presently facing misclassification claims brought by mortgage loan officers —unaware that mortgage loan officers are still non-exempt, at least with respect to the application of the administrative exemption.

Dana Frederick Clarke is a partner in the California office of Hudson Cook, LLP. Basis Points readers can reach Dana at 714.263.0427 or by email at dclarke@hudco.com.