By Bill Foster

In the mid to late 2000s, the banking world was beset by a flood of wage and hour lawsuits brought by groups of employees (mortgage loan officers, mortgage brokers, loan consultants, etc.) that had long been presumed to be exempt from the Fair Labor Standards Act’s (“FLSA”) overtime requirements.  The financial impact of these cases was significant, for example:

• On Feb. 9, 2006, UBS agreed to pay up to $89 million to resolve multiple lawsuits based on claims of failure to pay overtime and alleged improper wage deductions to retail brokers, financial consultants, and trainees.
• On March 3, 2006, Morgan Stanley announced that it would pay up to $42.5 million to settle a California suit brought on behalf of about 5,000 financial advisers.
• On May 24, 2006, Smith Barney announced it is paying $98 million to a potential class of over 20,000 brokers in California, N.Y., and N.J.

Although these lawsuits have certainly not gone away, banks and other financial service companies were offered a needed measure of protection when the United States Department of Labor (“DOL”) issued two favorable Opinion Letters.  The first was issued in March 2006 and provided that certain loan officers who work “outside” their employer’s offices can be exempt as “outside salesmen.”  The second Opinion Letter was issued in September 2006 and held that certain loan officers, if paid a guaranteed minimum salary each week, could meet the requirements of the administrative exemption.

In a stunning decision, the DOL recently issued an “Administrator’s Interpretation” in which it concluded that employees who perform the “typical duties of a mortgage loan officer” are not properly classified as exempt from the overtime provisions of the FLSA.  In so doing, the DOL expressly withdrew two prior DOL opinion letters, including the above-referenced September 2006 opinion that had specifically concluded mortgage loan officers could meet the requirements of the administrative exemption. 

The DOL’s action is all the more troubling because it was not prompted by any fact-specific request from an industry or employer group for guidance, which is how DOL opinions have traditionally been generated.  Instead, the DOL announced that it will no longer issue such Opinion Letters and will now issue periodic “Administrator Interpretations” setting forth a general interpretation of the law, applicable more broadly to all parties impacted by the provision at issue.  The DOL’s aggressive move also deprives employers and other parties from participating in the process by removing the aspect of notice and comment from the process.

The DOL’s actions will dramatically affect the banking industry.  The FLSA requires that all employees be paid overtime (one and one-half times their regular rate of pay) for all hours worked in excess of forty in a single work week.  Employers who fail to pay employees overtime are liable for all unpaid overtime (for up to three (3) years), which is often presumptively doubled as liquidated damages, plus costs and attorneys’ fees.  Making matters worse, the FLSA allows employees to bring “collective actions” on behalf of similarly situated workers, greatly increasing their leverage as well as the potential damages and attractiveness to plaintiff’s counsel.

There are several exemptions to the overtime requirement, commonly referred to as the “white collar” exemptions.  These exemptions include the executive, administrative and professional exemptions, and each requires that the employee meet both a salary basis and a duties test.  Unless the loan officer manages two or more employees, the most common exemption to be applied is the administrative exemption.  To qualify for this exemption, the employee must meet three (3) tests:

1. the employee must be paid a guaranteed weekly salary of not less than $455, without deductions based on the quality or quantity of the work performed;
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 DOL had previously applied this test, as well as new regulatory guidance from the FLSA’s 2004 final regulations, to conclude in its September 2006 opinion letter that loan officers were properly classified as exempt.  The 2004 regulations contained a specific provision suggesting that employees in the “financial services industry” could qualify as exempt administrative employees so long as certain conditions were met:

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.

29 CFR § 541.203(b) (emphasis added). 

In reversing course, the DOL rejected its prior interpretation of the above provision, finding that its prior guidance suggested an exception that swallowed the basic requirements of the administrative exemption.  The DOL’s focused its analysis on the second factor and found that the primary duty of loan officers was related to sales and not the business operations or their employer or its customers (the “production versus administrative” dichotomy).  The DOL noted that many loan officers are paid primarily by commission, are compensated based on sales volume and making sales quotas, and are extensively trained in sales.  The DOL also noted that many banks had justified the exempt status of these employees by contending that they were exempt as “outside salesmen” or comparing them to commissioned sales employees of retail or service establishments, thereby reinforcing the conclusion that their primary duty was sales and not administration.

Although this Administrator’s Interpretation does not have the “force of law,” it serves as persuasive authority.  The DOL’s Interpretation also comes on the heels of the United States Supreme Court’s recent refusal to hear an appeal from JP Morgan from the Second Circuit Court of Appeals Decision in J.P. Morgan Chase v. Whalen.  In that late 2009 case, the Second Circuit concluded that plaintiffs, a group of mortgage loan underwriters, were essentially working in a “production” position (the loans serving as the bank’s product) and thus had the primary duty of making sales. 

As a result, employers in this industry should take immediate steps to evaluate their compensation practices to ensure that employees are properly classified under the FLSA.  In so doing, attention should also be paid to the salary basis component of the analysis.  An employee who is not paid a guaranteed salary of at least $455 per week (e.g., pure commissions) cannot be classified as exempt under the administrative test, regardless of the nature of their duties.  Such employees may be considered exempt under the exemption for outside sales employees, but only if they spend the majority of their work away from their employer’s office (or even a home office) in face to face meetings with clients. 

If you are presently compensating a loan officer (or similar employees) based on pure commissions or without a guaranteed weekly salary of at least $455, and that individual works primarily in the office, or in their home office, they are likely entitled to overtime.  Such employees may also have a claim for unpaid minimum wage for every hour worked.  Defending a wage and hour claim brought by one of these workers will be particularly difficult because the employer will most likely not have any accurate record of their hours worked.

Prompt action by employers on this issue is required to avoid potential liability.  Pursuant to the  FLSA’s “good faith reliance” defense, claims against an employer based on the DOL’s prior rulings may be barred.  Thus, employers may be protected from overtime claims by loan officers by arguing that they were classified as exempt in reliance on the DOL’s prior written guidance.  However, this protection will be lost as to claims arising after March 24, 2010, and the failure to act in response to this new guidance could be used as evidence to support a claim for liquidated (or double) damages.

Should you have any questions or concerns regarding the above, please contact your legal counsel.