On March 24, 2010, the U.S. Department of Labor (DOL) issued an Administrator's Interpretation reversing its prior guidance and concluding that a "typical" mortgage loan officer does not qualify for the administrative overtime exemption under the Fair Labor Standards Act. This is a significant reversal in the DOL's position which signals to financial institutions that reassessment of their employment classifications is prudent.
Employees of financial institutions are generally entitled to overtime, meaning one and one-half times their regular rate of pay, for all hours worked over forty in one work week. There are several exemptions to the overtime rules, including those known as the "white collar exemptions." The white collar exemptions include the executive, administrative and professional exemptions. Each separate exemption requires the employee in question to meet both a salary basis test and a duties test. Previously, mortgage loan officers were found to be exempt under the administrative exemption.
For an employee to qualify for the FLSA administrative exemption, the employee's compensation and job duties must meet the following three tests:
In its Administrator's Interpretation, the DOL focused on the second of these requirements, that is:
Whether the primary duty of employees who perform the typical job duties of a mortgage loan officer is office or non-manual work directly related to the management or general business operations of their employer or their employer's customers.
In analyzing this issue, the DOL applied its long-standing rule that the application of the overtime exemptions depends on the particular job duties of the employee in question (an employee's title or job description are not determinative). Thus, the DOL identified the "typical" duties of a mortgage loan officer as follows:
On the basis of these "typical" duties of mortgage loan officers, the DOL concluded that the administrative exemption would not apply. The DOL largely based its analysis on what it has referred to as the production-versus-administrative dichotomy, which focuses on determining whether the employee's duties are primarily related to production (e.g., sales of the entity's products or services) or administration (e.g., management of the entity's internal operations). "Production" work, or sales work, is not considered work that qualifies for the administrative exemption. Applying this framework, the DOL concluded that the characteristics of a "typical" mortgage loan officer overlap with sales-related characteristics that have been identified in previous court cases. In particular, the DOL noted that, like a sales person, a "typical" mortgage loan officer is compensated primarily by commissions, evaluated on the basis of sales volume, and trained in sales techniques. The DOL also pointed out that employers have previously succeeded in classifying mortgage loan officers as exempt under the outside-sales exemption. Thus, the DOL concluded that the duties of a "typical" mortgage loan officer are related to sales and therefore the administrative exemption does not apply.
The DOL's analysis and conclusion in this Administrator's Interpretation is concerning for at least two reasons. First, the DOL's reliance on the "production-versus-administrative" dichotomy represents a somewhat confusing about face. Although the production-versus-administrative analytical framework has been used for some time, it has been widely criticized as problematic. In the modern employment context, and particularly in service industries, many white-collar jobs blur the line between sales or production and internal management. In fact, in the 2004 final FMLA regulations, the DOL indicated that the production-versus-administrative dichotomy should not be the determinative framework for analyzing the application of the administrative exemption: "We do not believe that it is appropriate to eliminate the concept entirely from the administrative exemption, but neither do we believe that the dichotomy has ever been or should be a dispositive test for exemption." Notwithstanding this statement, the analysis of the March 24 Administrator's Interpretation appears to be premised largely on that dichotomy. Thus, it is possible that the DOL is signaling a return to reliance on the production-versus-administrative framework. The consequence of such a shift could be a more limited application of the administrative exemption for employers.
A second troubling aspect of the Administrator's Interpretation is that it withdraws two recently issued opinion letters, indicating that the DOL may significantly shift its interpretation of the FLSA. In one of these opinion letters, which was issued in 2006, the DOL concluded that the position of mortgage loan officer described by the employer, which shared many of the characteristics of the "typical" mortgage loan officer described in the March 24 Administrator's Interpretation, qualified for the administrative exemption. Moreover, in the 2006 opinion letter, the DOL reached its conclusion that the exemption applied despite the fact that the position described entailed some sales-related functions. Instead of finding that those sales-related duties precluded application of the administrative exemption, the DOL concluded that the mortgage loan officers had "a primary duty other than sales, as their work includes collecting and analyzing a customer's financial information, advising the customer about the risks and benefits of various mortgage loan alternatives in light of their individual financial circumstances, and advising the customer about avenues to obtain a more advantageous loan program." The recent Administrator's Interpretation came to the opposite conclusion, finding that any non-sales-related work was "incidental" to the mortgage loan officer's primary sales-related duties. The Administrator's Interpretation dismissed the DOL's analysis in its prior opinion letter as "selective" and "narrow." This criticism and withdrawal of recently issued guidance is concerning because it suggests that the DOL intends to use Administrator's Interpretations to revise its interpretation of the FLSA.
The term "Administrator's Interpretation" is a new one. In issuing the guidance on March 24, the DOL announced that it is abandoning its long-standing practice of issuing fact-specific opinion letters in favor of Administrator's Interpretations. In contrast to opinion letters, which are responses to a specific set of facts submitted by employers, Administrator's Interpretations will set forth general interpretations of the law and regulations to clarify the law as it relates to an entire industry, a category of employees, or to all employees. The DOL believes that this shift toward more generalized guidance will increase the DOL's efficiency in issuing guidance, because each Administrator's Interpretation will set forth a general interpretation of the law and regulations, applicable across-the-board to all those affected by the provision in issue. While Administrative Interpretations are not binding on courts, they are often given significant weight in litigation and indicate the agencies' views on these issues. Thus, Administrator's Interpretations are significant because it is agencies, not courts, that investigate and audit employer pay practices.
The DOL's new pronouncement on mortgage loan officers signifies that banks should examine their overtime classifications and consider making appropriate adjustments.
If you have any questions about these issues, please contact Jennifer Mirus at (608) 283-1799 or jmirus@boardmanlawfirm.com.
"John Knight is the complete package when it comes to solid advice on all of the challenges and opportunities that our bank faces in today's volatile economy. John's background and experience are renowned. I have always found him to be steady in his demeanor and approach to problem solving and that is a big plus given the current regulatory environment for banking."
-- E. David Locke, Chairman and CEO of McFarland State Bank
"John Knight and the banking group at Boardman are thoroughly knowledgeable on federal and state banking laws and have demonstrated decades of commitment to the sound representation of Wisconsin banks and WBA."
-- Rose Oswald Poels, President & CEO of the Wisconsin Bankers Association