The Supreme Court Decides: The DOL’s Interpretation Regarding Pay for Mortgage Loan Officers Is Enforceable
This article first appeared in the July 2015 issue of the Minnesota Bankers Association’s monthly newsletter.
The U.S. Supreme Court has decided that the federal Department of Labor’s (DOL’s) March 24, 2010, Administrator’s Interpretation that mortgage loan officers typically must be paid as nonexempt employees under the federal Fair Labor Standards Act (FLSA) is enforceable. (Perez v. Mortgage Bankers Ass’n). This means that, unless an exception applies, mortgage (and other) loan officers must, like all nonexempt employees, keep a time record of all time worked, receive no less than minimum wage for every hour worked, and be paid overtime for all hours worked over 40 in a work week. The 2010 Administrator’s Interpretation withdrew and reversed the DOL’s earlier 2006 Opinion Letter establishing the DOL’s position at that time that mortgage (and other) loan officers typically were properly paid as “administrative exempt” employees, not subject to the timekeeping, minimum wage and overtime requirements of nonexempt employees.
The Supreme Court’s Decision
Following the release of the 2010 Administrator’s Interpretation, several legal challenges occurred. The one of most significance was in the D.C. Circuit (the Mortgage Bankers Ass’n case that eventually went to the Supreme Court). In July 2013, the D.C. Circuit granted summary judgment to the Mortgage Bankers Association (MBA) and held that the 2010 Administrator’s Interpretation was invalid because the DOL had not followed the note-and-comment procedures of the federal Administrative Procedure Act for reversing its 2006 opinion.
The case went to the Supreme Court on that issue alone (and not the issue of whether the DOL’s Interpretation that mortgage loan officers must be paid as nonexempt employees was correct), and on March 9, 2015, the Supreme Court unanimously overruled the D.C. Circuit. This ruling means that the 2010 Administrator’s Interpretation stands—mortgage (and other) loan officers typically need to be paid as nonexempt employees.
“Exempt” and “Nonexempt” – What’s the Difference?
To be an “administrative exempt” employee under the FLSA, the employee must be paid on a salary or fee basis (currently equaling no less than $455 per week) and the employee’s primary job duty must be the performance of nonmanual work that is directly related to the management or general business operations of the employer or the employer’s customers.
Per the governing regulations, work related to “management or general business operations” is work related to assisting in running or servicing the business, as opposed to work related to manufacturing or selling a product. Examples include services such as the following:
- Tax, finance, accounting, budgeting, auditing, insurance
- Quality control, purchasing, procurement
- Advertising, marketing
- Safety and health
- Personnel management, human resources, employee benefits, labor relations, public relations, government relations
- Computer network, internet and database administration
- Legal and regulatory compliance, and
- Similar activities
In addition, an “administrative exempt” employee’s primary duty must include the exercise of “discretion and independent judgment with respect to matters of significance.” This requirement is demonstrated by the authority to make significant decisions and carry out major projects or functions. Factors to consider include the following:
- Whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices
- Whether the employee carries out major assignments in conducting the operations of the business
- Whether the employee performs work that affects business operations to a substantial degree, even if the employee’s assignments are related to operation of a particular segment of the business
- Whether the employee has authority to commit the employer in matters that have significant financial impact
- Whether the employee has authority to waive or deviate from established policies and procedures without prior approval
- Whether the employee has authority to negotiate and bind the company on significant matters
- Whether the employee provides consultation or expert advice to management
- Whether the employee is involved in planning long- or short-term business objectives
- Whether the employee investigates and resolves matters of significance on behalf of management
- Whether the employee represents the company in handling complaints, arbitrating disputes or resolving grievances
“Administrative exempt” employees must have the authority to make an independent choice, but their decisions or recommendations may be reviewed at a higher level. The exercise of discretion and independent judgment must be more than the use of skill in applying well-established techniques, procedures or specific standards described in manuals or other sources. The exercise of discretion and independent judgment does not include clerical or secretarial work, recording or tabulating data, or performing other mechanical, repetitive, recurrent or routine work.
The 2010 Administrator’s Interpretation determined that the primary duties of mortgage loan officers typically were not that of an “administrative exempt” employee but rather that of a nonexempt inside sales employee (i.e., a production worker) whose job was to make sales on behalf of their employer based on the following factual summary of the primary job duties and pay relative to mortgage loan officers:
- They solicit customers,
- They receive sales training,
- They often are compensated by commission but may receive some base or a draw against commissions, and
- They are held to a production standard on their sales of loan products.
The Possible Exception
The 2010 Administrator’s Interpretation acknowledged that mortgage (and other) loan officers may be properly classified and paid as administrative exempt employees in some instances but only if their primary duty is directly related to the management or general business operations of their employer or their employer’s customers and meet all of the other requirements for an administrative exempt employee. In other words, making sales to individual consumers seeking mortgages and advice for their purchase of their own homes does not qualify as administrative exempt work. But, if the customer is a business and, for example, is seeking advice about a mortgage to purchase land for a new manufacturing plant or other business purpose, the commercial loan officer might qualify as an administrative exempt employee if the officer were making decisions related to the general business operations of the business customer. Banks and other employers must consider carefully, however, whether they want their commercial loan officers to be making decisions on matters of significance directly related to the customer’s business.
Pursuant to the 2010 Administrator’s Interpretation, banks and other entities should review the exempt/nonexempt classification of all their mortgage (and other) loan officers, both consumer and commercial, and determine whether any reclassification needs to occur for legal compliance. Consulting with legal counsel for this review and decision-making is strongly advised.