Employment Law / Banking

FLSA Interpretation Requires Banks to Take Action Regarding Loan Officer Overtime Pay

June 2010

Overview: Fair Labor Standards Act and Exemptions to Overtime Requirement

The Fair Labor Standards Act (FLSA) is a Federal law, administered by the U.S. Department of Labor that, in pertinent part, regulates minimum wage and overtime requirement. The FLSA overtime regulation requires that any employee who works over 40 hours in a week is paid time-and-one-half. However, the FLSA exempts from that overtime requirement employees whose job duties and wages meet the criteria of one of these exemptions:

Highly compensated employees
Computer employees
Outside sales
Professional
Executive or administrative.

If an employee meets the criteria for an exemption, then the employee can be classified as exempt and the employer will not have to pay overtime for any time that employee works over 40 hours per week.

Until recently, many mortgage loan officers of banks were generally eligible to be included within the Administrative Exemption. The Administrative Exemption criteria are:

Employee is paid at least $455 per week on “salary basis;” and
Employee’s “primary duty” is 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 the primary duty includes the exercise of “discretion and independent judgment” with respect to “matters of significance.”

It is important to note that the terms “salary basis,” “primary duty,” “independent judgment,” and “matters of significance” are all terms that have been defined by either USDOL regulations and/or case law and, therefore require legal analysis. For example, “primary duty” is defined as the principal or most important duty that usually takes a majority of the employee’s time and is unrelated to job title — actual performed duties is what matters.

Prior USDOL guidance and opinion letters stated that the primary duty of mortgage loan officers satisfied the duties requirement of the Administrative Exemption and, therefore, those employees could be classified as exempt if they met the salary test. On March 23, 2010, the USDOL issued Interpretation No. 2010-1 (Interpretation), which changed the classification of some mortgage loan officers to non-exempt — entitled to overtime for all time worked over 40 hours per week. Therefore, mortgage loan officers whose status should have been changed to non-exempt, but has not been to date, present potential ongoing liability to banks in the form of a violation of the FLSA.

Interpretation No. 2010-1: Changing the Classification to Non-exempt.

On March 23, 2010, the USDOL issued an Interpretation effectively reversing its prior guidance/opinion letters that classified all mortgage loan officers as exempt employees pursuant to the Administrative Exemption. The Interpretation states that employees who perform the “typical job duties” of mortgage loan officers (also, mortgage loan representatives, mortgage loan consultants, and mortgage loan originators) who supports consumers, do not satisfy the criteria of the Administrative Exemption from the overtime requirements of the FLSA because their primary duty is making sales for the bank and, therefore, not directly related to the bank’s management or general business operations. The Interpretations listed eight “typical job duties” that are generally accepted as accurate in the industry. In addition, services to residential mortgage loan customers (consumers), by definition, are not directly related to the consumers’ own management or their own general business operations because they have none (they are individuals). For those reasons, the primary duty criteria of the Administrative Exemption are no longer met for mortgage loan officers who service consumers.

In its Interpretation, the USDOL also considered that mortgage loan officers were paid usually by commission, based on their sales, and that banks trained mortgage loan officers on sales techniques and evaluated them on the volume of their sales. The Interpretation implies that commercial loan officers might continue to be exempt pursuant to the Administrative Exemption, depending on the outcome of the primary duty analysis. However, a careful, well-documented audit should be conducted to ascertain the primary duty of commercial loan officers.

How Should Banks Respond?

One thing is definite: as of March 23, 2010 mortgage loan officers who are classified erroneously as exempt employees are entitled to overtime for all time worked over 40 hours in a week. Banks should determine which mortgage loan officers are no longer exempt pursuant to the Administrative Exemption by conducting a thorough audit. The audit requires more than simply reading job descriptions and performance evaluations to ascertain an employee’s primary duty, but should include employee interviews to confirm actual job duties performed which sometimes may not be reflected in the existing job description. It’s worth the extra effort for banks to conduct a thorough audit of all its currently exempt employees since the Interpretation may have implications regarding other positions (e.g., consumer lenders, personal bankers, and brokers) and further Interpretations may be issued regarding the criteria of other exemptions.

After the audit, if it is determined that there are employees who should no longer be considered exempt pursuant to the Administrative Exemption, then the bank should consider whether the employees’ wages (if applicable) and duties fit within one of the other enumerated FLSA exemptions listed above. If so, then the employee can continue to be classified as exempt and not paid overtime.

However, if no exemption applies and the bank must pay overtime, the bank can consider policies to mitigate the cost of overtime such as policies that require the prior authorization of overtime and application of the salaried-non-exempt/fluctuating work week method. Although some action must be taken to avoid potential damages for violation of the FLSA, it is vital that the action be reviewed by a professional to ensure that the action provides the best solution for the bank without exposing it to further liability. For example, a bank might consider classifying the employee as an independent contractor. If the bank were to do so, it would likely increase liability given the current political climate regarding independent contractors and the various “tests” for independent contractors that exist among Federal and State agencies.

A Bad Strategy: Wait and See/Inaction

The number of USDOL inspectors has doubled since the change in administration. If audited or if an employee files a wage complaint, damages will not only include overtime that should have been paid, but also administrative fines ($1,100 per violation) and, potentially, liquidated damages. If a bank promptly addresses this issue and reclassifies an employee, it may support a good faith defense and possibly limit any liquidated damages. In addition, well-documented audits may provide objective evidence to support a defense of good faith reliance on the Interpretation — yet another good reason to take action by conducting an audit and reclassifying employees when necessary. Therefore, inaction results in continuing damages, whereas action will most probably limit damages.

For more information on this matter, including developing action strategies that integrate internal audits, analyzing exemptions, and implementing policies to mitigate overtime costs, please contact Beth Deragon at (603) 545-3657.

* Beth Deragon is admitted in New Hampshire.

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