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Re-Examine Your Classification of Mortgage Loan Employees: Are They Still Exempt Employees Under New Interpretation?

April 08, 2010

Currently, many financial institutions designate mortgage loan officers and staff as employees who are exempt from overtime and minimum wage requirements under the Fair Labor Standards Act. On March 24, 2010, the U. S. Department of Labor, Wage and Hour Division announced in an "Administrator's Interpretation" that employees who perform the typical responsibilities of a mortgage loan officer do not qualify as bona fide exempt employees under the administrative exemption under the FLSA. This interpretation is a reversal of prior written interpretations from the Department of Labor. As a result, employers with employees who perform typical duties of mortgage loan officers will have to review their classification of these employees and, if necessary, reclassify employees and address whether any overtime compensation may be due to these employees.1

A. The Fair Labor Standards Act.
The Federal Fair Labor Standards Act ("FLSA") establishes a federal minimum wage, requires overtime wages to be paid in certain circumstances, and addresses a number of other wage and hour issues that have a significant impact on most businesses. Under the FLSA, there is a two-year statute of limitations and, for willful violations, a three-year statute of limitations. As a result, if an employee has been misclassified as an exempt employee, that employee may be able to claim up to three years' worth of overtime compensation to which he or she may be due.

Employers reclassifying employees from exempt to non-exempt must be cognizant not only of potential monetary damages that may be available -- including class action lawsuits and recovery of plaintiffs' attorney fees -- but also the human resources impact on employees who are told they are now designated as non-exempt.

B. The Administrative Exemption Under the FLSA.
In order to be exempt within the meaning of an "employee employed in a bona fide administrative capacity," an employee's job duties must meet all of the following tests:

  1. The employee must be compensated on a salary basis or fee basis as defined in the regulations at the rate of not less than $455 per week;
  2. 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
  3. The employee's primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.

The Administrator's Interpretation focuses on the application of the second test.

C. Facts Used in the Administrator's Interpretation.
The issuance of an Administrator's Interpretation is unique to the Department of Labor. In the past, the Department has responded to individual, fact-based inquiries about application of wage and hour laws. The opinion letters that were issued in the past were based on a discrete set of facts and usually included language from the Department making clear that the facts of any given case were essential to the decision. The use of the new tool of Administrator's Interpretations, however, is potentially troubling for employers. Rather than rely on a discrete, particular set of facts, the Department is now free to select its own set of facts to create a scenario in which the Department can issue a broad, far-reaching opinion. In a way, the Department has moved from guidance on individual requests to advocacy for an interpretation of law.

Attention to the facts the Department used in this Administrator's Interpretation is, therefore, critical to undertake an analysis of your own employees. To the extent your employees perform duties that exceed or are different than the facts the Administrator relied upon, an argument can be made that the Administrator's conclusion is not applicable to your employees.

The financial services industry assigns a variety of job titles to employees who perform the duties of a mortgage loan officer. Job titles include mortgage loan representative, mortgage loan consultant and mortgage loan originator. A job title does not determine whether an employee is exempt. Only the employee's actual job duties and compensation determine whether an employee is exempt or non-exempt under the FLSA.

For purposes of the Administrator's Interpretation, the Wage and Hour Division has determined that the following are typical mortgage loan officer job duties:

  1. Receive internal leads and contact potential customers or receive contacts from customers generated by direct mail or other marketing activity;
  2. Collect required financial information from customers they contact or who contact them, including information about income, employment history, assets, investments, home ownership, debts, credit history, prior bankruptcies, judgments and liens;
  3. Run credit reports;
  4. Enter the collected financial information into a computer program that identifies which loan products may be offered to customers based on the financial information provided;
  5. Assess the loan products, identify and discuss with a customer the terms and conditions of particular loans, trying to match the customer's needs with one of the company's loan products;
  6. Compile customer documents for forwarding to an underwriter or loan processor; and
  7. Finalize documents for closings.2

D. Analysis in the Administrator's Interpretation.
To be exempt, a mortgage loan officer's primary duty must be either the performance of office or non-manual work directly related to the management or general business operations of the employer; or performance of office or non-manual work directly related to the management or general business operations of the employer's customers.

  1. Directly Related to the Management or Operations of the Employer.

Management or business operations of an employer means assisting with the running or servicing of the business versus working on a manufacturing production line or selling products in a retail or service establishment. Examples of management or business operations include work in functional areas such as accounting, budgeting, quality control, purchasing, advertising, research, human resources, labor relations, and similar areas. The administrative exemption applies to employees whose primary duty relates to administrative as distinguished from production operations of a business.

Part of the analysis used by the Administrator was to determine whether mortgage loan officers had the primary duty of making sales. The factors used to make that determination include:

  1. the employee's job description;
  2. the employee's qualifications for hire;
  3. sales training;
  4. method of payment; and
  5. portion of earnings directly attributable to sales.

In applying these factors, the Administrator indicated that loan officers analyzing financial data are doing so to "make a sale." They are screening the information for the benefit of the employer rather than providing services for the benefit of the customer. Historically, mortgage loan officers were compensated entirely by commissions and today many are paid primarily by commissions. Commissions typically are earned when sales are completed and are based on the amount of the loan. Such payment methods support the conclusion that a mortgage loan officer's primary duty is sales. The Administrator concluded that most mortgage loan officers' duties are primarily related to sales and, therefore, mortgage loan officers are performing production work for their employers.

2. Directly Related to the Management or Operations of the Employer's Customers.

The administrative exemption can also apply if the employee's primary duty is directly related to the management or general business operations of an employer's customers. If the employees are acting as advisors or consultants to their employer's clients or customers, those employees may be exempt. Work for an employer's customers does not qualify for the administrative exemption where the customers are individuals seeking advice for their personal needs.

In previous opinion letters, the Department had concluded that mortgage loan officers who engaged in analysis and advice related to residential mortgages could be exempt under the administrative exemption. In the recent Administrator's Interpretation, however, that opinion letter was withdrawn and effectively declared as erroneous interpretation. The Administrator emphasized that work for an employer's customers does not qualify for the administrative exemption where the customers are individuals seeking advice for their personal needs, such as people seeking mortgages for their homes. If the customer is a business, advice from a bank loan officer regarding decisions on a commercial mortgage to purchase land for a new manufacturing plant or acquire a warehouse presumably will still qualify under the administrative exemption.

Based on this analysis, a mortgage loan officer's primary duty is not related to management or operations of the employer's customers and the typical mortgage loan officer does not qualify as an exempt employee.

E. Practical Implications.
The FLSA has a two-year statute of limitations and a three-year statute of limitations for willful violations. Wisconsin law contains a two-year statute of limitations. Unfortunately for industries that employ mortgage loan officers, the Administrator's Interpretation reverses a favorable interpretation from only three years ago. Employers should carefully review the job duties of any employee who has the responsibilities of a mortgage loan officer. In addition, to the extent an employer relied upon previous interpretations of specific regulations addressing the financial services industry as a whole, such reliance must now be called into question.

F. Action Items.

  1. Review this update and the Administrator's Interpretation with the appropriate human resource or other personnel management employees at your institution.
  2. Determine which employees have duties of a mortgage loan officer, even if their title is different.
  3. Perform an analysis of the employee's primary duties in relation to the list of duties contained in this update and the Administrator's Interpretation.
  4. Conduct an analysis of whether the employee is providing services to individual customers or businesses.
  5. Work with legal counsel to analyze the most appropriate way in which to change the employee's designation and adjust the compensation plan to account for this new designation.

Employers should consider conducting this analysis with guidance from its legal counsel.

If you have any questions regarding the Administrator's Interpretation, please contact: Christine McLaughlin at (414) 287-9232,

1Note that the Administrator's Interpretation applies only to mortgage loan officers who spend a majority of their time working inside the employer's place of business. It does not apply to those persons who are "outside sales" employees customarily and regularly working away from their employer's place of business.

2Again, it is important to note that the Administrator's Interpretation applies to employees who spend the majority of their time working inside their employer's place of business, including employees who work in offices located in their homes. It does not apply to outside sales mortgage loan officers who are customarily and regularly engaged away from the employer's place of business.

This Financial Institutions Update is published to provide our friends and clients with current information that may affect their businesses. This information is not intended to serve as specific legal advice or as a solicitation for business. The information in this Update is not intended to create a lawyer-client relationship.

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