Alert March 19, 2015

Supreme Court Ruling Validates DOL’s 2010 Interpretation Regarding FLSA Status of Mortgage-Loan Officers


The Supreme Court recently rejected a challenge to the validity of a 2010 interpretation by the U.S. Department of Labor (the “DOL”), which had concluded that the administrative exemption of the Fair Labor Standards Act generally does not apply to mortgage-loan officers. The 2010 interpretation will be entitled to some deference, but does not necessarily foreclose an employer from arguing that mortgage-loan originators qualify as exempt administrative employees. This alert offers a review of the Supreme Court’s decision and the 2010 interpretation, and offers some guidance for employers.

The Supreme Court recently unanimously rejected a challenge to the validity of a 2010 interpretation by the U.S. Department of Labor (the “DOL”), which had concluded that the administrative exemption of the Fair Labor Standards Act (“FLSA”) generally does not apply to mortgage-loan officers. The Court’s decision is Perez v. Mortgage Bankers Association

Under the DOL interpretation (the “2010 Administrator’s Interpretation”), the administrative exemption is not applicable to mortgage-loan officers, and therefore they are entitled to overtime pay under the FLSA unless they qualify under another exemption.  In most cases, the only potentially viable alternative exemption is the outside sales exemption, and there are many situations in which that exemption would not be compatible with the nature of a mortgage-loan originator’s job functions. Although the effect of the Perez decision is to leave in place the 2010 Administrator’s Interpretation, the decision did not itself assess whether mortgage-loan officers qualify for the FLSA’s administrative exemption.  Instead, it focused on questions of administrative law. The Supreme Court held that a federal agency’s significant changes to prior “interpretations” of its own regulations (as distinguished from changes to the regulations themselves) need not be issued through the public notice-and comment process under the Administrative Procedures Act.

The DOL interpretations at issue in Perez regarding mortgage-loan officers have been the subject of much attention in recent years. By way of background, the DOL issued an opinion letter in 2006 (the “2006 Opinion Letter”) concerning the application of the administrative exemption under the FLSA to mortgage-loan officers who work primarily in their employer’s offices or at home offices. The 2006 Opinion Letter concluded that such mortgage-loan officers qualified as exempt administrative employees.  In support of that conclusion, the 2006 Opinion Letter cited FLSA regulation 29 C.F.R. §541.203(b) for the proposition that “employees in the financial services industry” generally have the primary duty of performing work “directly related to the management or general business operations” of their employer when “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.” 

Four years later, the DOL issued the 2010 Administrator’s Interpretation, which reversed course on the issue and rescinded the 2006 Opinion Letter. The 2010 Administrator’s Interpretation found that mortgage-loan officers’ primary duty is to make sales. Under the FLSA regulations, an employee whose primary duty is to make sales cannot qualify as an exempt administrative employee. The 2010 Administrator’s Interpretation rejected the argument that the primary duty of mortgage-loan officers is to promote sales generally rather than to make individual sales.  However, the 2010 Administrator’s Interpretation left open the possibility that mortgage-loan officers may qualify for the FLSA’s separate outside sales exemption if, pursuant to 29 C.F.R. § 541.500, they “customarily and regularly” engage in the sale of mortgage loans outside of their employers’ offices and outside of any home office.

The 2010 Administrator’s Interpretation became the impetus for the Perez litigation. The Mortgage Bankers Association sued the Secretary of Labor in federal district court arguing that the 2010 Administrator’s Interpretation was procedurally invalid, and should therefore be vacated, because the DOL failed to submit it for public notice-and-comment. A federal district court in the District of Columbia granted summary judgment for the DOL, but the D.C. Circuit Court of Appeals reversed and vacated the 2010 Administrator’s Interpretation. The D.C. Circuit held that the Administrative Procedure Act required the DOL to submit the 2010 Administrator’s Interpretation for public notice-and-comment because the 2010 Administrator’s Interpretation conflicted with the 2006 Opinion Letter. As noted above, the Supreme Court then granted certiorari and reversed the D.C. Circuit’s holding and decision to vacate the 2010 Administrator’s Interpretation.  

In Perez, the Supreme Court did not specify the level of deference to be given to the 2010 Administrator’s Interpretation. Indeed, the majority opinion observed that agency interpretations “do not have the force of law.” However, in a 1997 Supreme Court case concerning a different interpretation issue concerning the FLSA, Auer v. Robbins, the Court held that the DOL’s interpretation of its own regulations was controlling unless “plainly erroneous or inconsistent with the regulation.” Some of the Justices of the Supreme Court have expressed willingness to reconsider or overrule the Auer standard, but it remains the law, at least for now.

Despite the Auer standard, there remains room for employers to argue that mortgage-loan officers may be exempt administrative employees in some circumstances. In 2012, the Sixth Circuit Court of Appeals held in Henry v. Quicken Loans, Inc. that a jury could properly find that mortgage-loan officers of Quicken Loans satisfied the administrative exemption.  The DOL had argued to the court in support of the plaintiffs in Henry that the 2010 Administrator’s Interpretation was entitled to “controlling deference.” Without referring specifically to the 2010 Administrator’s Interpretation, the court stated that “non-binding opinion letters” by the DOL addressed “distinct scenarios,” and therefore did not foreclose the possibility that in some cases mortgage-loan officers can qualify as exempt administrative employees. 

It is significant that Henry involved the review of a jury determination that mortgage-loan officers qualified as administrative employees. The result could well be different in a case in which an employer seeks summary judgment concerning its classification before trial, since under the summary judgment standard, all genuine issues of material fact would need to be considered in the light most favorable to the mortgage-loan officers.  For example, in Pontius v. Delta Financial Corp., which predated the 2010 Administrator’s Interpretation, a federal district court in the Third Circuit denied summary judgment for an employer in the face of “well support[ed]” evidence that its mortgage-loan officers primary duties are to “generate loan sales,” which it concluded was nonexempt work. 

Although Henry indicates that there remains room for argument that the administrative exemption can apply to mortgage-loan officers, plaintiffs’ lawyers will undoubtedly argue that the 2010 Administrator’s Interpretation will at least generally require a finding that the administrative exemption does not apply to mortgage-loan officers. Employers of mortgage-loan officers that seek to treat such employees as exempt should consider the viability of two alternatives.  One alternative would be to structure their positions to satisfy the outside sales exemption, which remains unaffected by the 2010 Administrator’s Interpretation. One of the requirements of that exemption is that employees be “customarily and regularly engaged away from the employer’s place or places of business.” Note that for these purposes any fixed site used for solicitation, including a home office, would be considered to be an employer’s place of business. 

The other potentially viable alternative would be to explore the applicability of the “highly compensated employee” standard. To qualify under that standard, employees must, among other terms, be paid a salary of $455 per week, receive at least $100,000 in total annual compensation and “customarily and regularly perform any one . . . of the exempt duties or responsibilities of an executive, administrative or professional employee.”  Some recent cases have applied this standard to the administrative exemption and have concluded that even if employees do not perform work directly related to management or general business operations, they could qualify for that exemption as highly compensated employees if they satisfy the compensation requirements and exercise discretion and independent judgment with respect to matters of significance. While the application of this standard to mortgage-loan officers may be disputed by some, it is a potentially promising avenue for employers of mortgage-loan officers who earn at least $100,000 per year.