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D.C. Court of Appeals Invalidates Department of Labor's Interpretation of the Exempt Status of Mortgage Loan Officers Under the FLSA

July 23, 2013

When the United States Department of Labor (DOL) issued its 2010 Administrator's Interpretation addressing the exemption from minimum wage and overtime requirements under the federal Fair Labor Standards Act (FLSA) for mortgage loan officers,1 banks and mortgage companies had reason to be concerned. The 2010 Administrator's Interpretation represented an about-face from the DOL's 2006 Opinion Letter, in which the DOL stated that employees performing the typical job duties of a mortgage loan officer qualified as exempt under the FLSA's administrative employee exemption from minimum wage and overtime requirements. The DOL's 2010 reversal created potential liability for employers who had previously relied on the 2006 Opinion Letter to classify their mortgage loan officers as exempt from minimum wage and overtime pay.

As a result of the DOL's reversal of its 2006 Opinion Letter, the Mortgage Bankers Association filed suit against the DOL in federal court, challenging the validity of the 2010 Administrator's Interpretation. The District Court's ruling in 2011 upheld the DOL's 2010 Administrator's Interpretation and focused in its ruling on procedural issues related to when an administrative agency, such as the DOL, may reverse a regulatory interpretation it has previously given.

On appeal regarding the appropriateness of the DOL's 2010 Administrator's Interpretation (Mortgage Bankers Association v. Harris), the United States Court of Appeals for the District of Columbia Circuit reversed the lower court's ruling and remanded the case back with instructions to vacate the 2010 Administrator's Interpretation. The Court of Appeals did not address the merits of the 2010 Administrator's Interpretation, however, and focused instead on the process the DOL used when it issued it. The Court reasoned that, because the 2006 Opinion Letter constituted the DOL's definitive interpretation of its rule as applied to individuals performing the typical job duties of mortgage loan officers, the DOL could only reverse such a definitive interpretation through the formal rulemaking process and not through issuance of an interpretation. The formal rulemaking process would, among other things, require the DOL to publish a notice of proposed rulemaking, allow the public an opportunity to comment on the proposed rule, and consider any public comments prior to finalizing the rule.

What Does This Court Decision Mean for Employers of Mortgage Loan Officers?
Given the ruling to vacate the 2010 Administrator's Interpretation, which may be appealed to the U.S. Supreme Court, it is as if the DOL's "expansive" 2010 Administrator's Interpretation essentially never existed. Note, however, that the Courts of Appeal for at least six other circuits have taken the position that changes to administrative interpretations do not require an administrative agency to follow the formal rulemaking process in situations like this. Thus, although the D.C. Court of Appeals handed the DOL a resounding defeat in this case, the ruling may have limited application pending further developments.

The D.C. Court of Appeals ordered the outright withdrawal of the DOL's 2010 Administrator's Interpretation, as opposed to limiting the reach of the decision to the District of Columbia Circuit. It is unlikely that the DOL will disobey the order of a federal court. Additionally, it would be impractical for the DOL to enforce the exemption regulations differently from one circuit to another, so it is possible that the DOL will decide to suspend enforcement of the 2010 Administrator's Interpretation on a national basis.

Based on the 2010 Administrator's Interpretation, however, employers should already know how the DOL plans to address the application of the administrative exemption to mortgage loan officers should it take up the formal rulemaking process. Since exemption determinations are made on a case-by-case basis, the DOL will have plenty of opportunities to challenge employer classifications of their mortgage loan officers.

Are There Limitations to the D.C. Court's Ruling?
The D.C. Court of Appeals decision, being in essence a "procedural" decision, did not address the merits of the DOL's 2010 Administrator's Interpretation. The court also did not address whether employers may again rely on the 2006 Opinion Letter, which the DOL withdrew with the publication of the Administrator's Interpretation in 2010 -- or whether any such reliance can be applied retroactively to 2010 (i.e., whether current misclassifications can be justified by the 2006 Opinion Letter).

Have We Heard the Definitive Word on Whether the Administrative Exemption Applies to Mortgage Loan Officers?
Clearly not. The Court of Appeals' decision is a step in the right direction to providing some clarity by directing employers back to the 2006 Opinion but, unfortunately, the decision is not the definitive word. This is a complex area of the FLSA and there are many moving parts to this issue. Here are a few possibilities as to how this matter might progress:

  1. The DOL could use its rulemaking process to formally reverse its 2006 Opinion Letter on this issue and institute its 2010 Administrator's Interpretation through that process. This may result in reclassifications of some of your mortgage loan employees to a status where they are eligible for overtime pay.
  2. Additional courts of appeals could follow the D.C. Circuit and invalidate the 2010 Administrator's Interpretation. If enough courts did so, there might be more confidence in the standing of the 2006 Opinion Letter, but the DOL could still attempt the rule-making process mentioned above.
  3. The U.S. Supreme Court could be asked to take this case and decide the matter. The Court occasionally decides these types of wage and hour issues.
  4. The DOL could simply step up enforcement activities against banks and other employers of mortgage loan employees using the principles behind the 2010 Administrator's Interpretation as a guide in its case-by-case approach to these matters.

What Should Employers of Mortgage Loan Officers Do Now?
It may be many months, perhaps even years, before additional clarity becomes available. Until then, the safest course of action is to maintain the non-exempt status of mortgage loan officers. By continuing to treat mortgage loan officers as non-exempt, and having them continue to be subject to minimum wage and overtime laws, the financial risks of misclassification are reduced.

While the Court of Appeals' ruling is definitely good news, the law is far from resolved. There are many unanswered questions. Consequently, employers of mortgage loan officers should also continue to carefully monitor the developing law in this area.

If you have any questions regarding the Court of Appeals' decision, the 2010 Administrator's Interpretation, the 2006 Opinion Letter or any other minimum wage and overtime exemption issues, please contact Godfrey & Kahn's Labor & Employment Practice Group member Rufino Gaytán at rgaytan@gklaw.com or 414.287.9572.

1The 2010 Administrator's Interpretation addressed job duties which the DOL considered typical for mortgage loan officers. For an in-depth discussion of the 2010 Administrator's Interpretation and the administrative exemption generally, please see our previous Client Alert Re-Examine Your Classification of Mortgage Loan Employees: Are They Still Exempt Employees Under New Interpretation?, originally published April 8, 2010 and available here.

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