April 15, 2010

DOL Concludes That "Typical" Office-Based Mortgage Loan Officers Are Eligible for Overtime Pay

The U.S. Department of Labor’s Wage and Hour Division recently issued an “Administrator’s Interpretation” in which it concluded that employees who perform the “typical duties of a mortgage loan officer” do not qualify as exempt from overtime pay eligibility under the commonly used exemption for “administrative employees.”  In reaching this conclusion, the Wage and Hour Division specifically withdrew two earlier Wage and Hour Division opinion letters, one of which had specifically concluded that mortgage loan officers could qualify as exempt from overtime pay eligibility as administrative employees.

The new Interpretation focuses on office-based mortgage loan officers.  Its reasoning could be used by employees in other office-based positions with substantial sales responsibilities to argue that such employees are also eligible for overtime pay.


The Fair Labor Standards Act (the “FLSA”) provides that employees are entitled to overtime pay at the rate of time and one-half for hours worked over 40 in a workweek unless an FLSA exemption applies.  The time and one-half calculation applies to most forms of pay, including wages, salaries, commissions and many forms of bonuses. 

In recent years, there has been considerable litigation on a class action or “collective action” basis seeking overtime pay, including some claims by groups of mortgage loan officers.  Employers typically defend overtime pay claims by mortgage loan officers based on one or both of two FLSA exemptions – the outside sales exemption and the administrative exemption.  For the outside sales exemption to apply, a mortgage loan officer must, among other requirements, “customarily and regularly” work away from the employer’s offices and even any home office.  This requirement makes that exemption inapplicable to mortgage loan officers who do not spend a substantial portion of their work time away from both an employer office and a home office.  Employers that classify office-based mortgage loan officers as exempt from overtime pay eligibility have therefore relied on the administrative exemption.

The basic standard for application of the administrative exemption is that an employee must (i) have a base salary of at least $455 per week; and (ii) have a “primary duty” of performing “office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers.”  That primary duty must include “the exercise of discretion and independent judgment with respect to matters of significance.”  29 C.F.R. §541.200. 

The application of the administrative exemption to employees who sell mortgages and financial products has been hotly debated and increasingly litigated.  Until the issuance of the Administrator’s Interpretation, the Wage and Hour Division had provided considerable support for the application of the administrative exemption to such positions through opinion letters issued during the most recent Bush administration.  Employers of mortgage loan officers could rely on those opinion letters in defending their classifications of such employees. 

Administrator’s Interpretation

The Administrator’s Interpretation expressly changes the Wage and Hour Division’s position concerning mortgage loan officers, including by specifically withdrawing an opinion letter that had found the administrative exemption applicable to certain mortgage loan officers and withdrawing another opinion letter concerning an unspecified category of loan officers.  The Administrator’s Interpretation focused in part on the “production versus administrative” dichotomy, which distinguishes between employees engaged in “production” and those engaged in running and servicing a business.  It states that if work is “squarely” production work, it cannot be administrative, and that even if it is not clearly production work, it must involve servicing the business to be administrative.  The Interpretation states that when an employee’s primary duty is making sales, the administrative exemption does not apply.  The Interpretation concludes that mortgage loan officers have a primary duty of making sales and therefore cannot come within the administrative exemption. 

The Interpretation rejects some of the arguments that employers have frequently raised to support the position that mortgage loan officers are engaged in work that is directly related to management or general business operations.  For example, the Interpretation rejects the argument that activities such as collecting financial information and explaining pros and cons of loan product options constitute means of servicing the employer’s business.  Instead, it characterizes such activities as incidental to making sales. 

The Interpretation also rejects an alternative argument based on the principle that an administrative employee’s primary duty may be directly related to the management or general business operations of an employer’s customers, rather than to those aspects of the employer itself.  To the extent that a mortgage loan officer primarily serves residential customers, the Interpretation rejects the argument that individuals purchasing homes have “business operations.”  Although the Interpretation does not expressly acknowledge this, there appears to remain an argument that commercial loan officers could satisfy this aspect of the administrative exemption standard, based on the argument that they service the business of commercial customers.

Policy Change Concerning Opinion Letters

The issuance of the Administrator’s Interpretation also marks a change in the Wage and Hour Division’s method of providing guidance concerning the FLSA.  Previously, the Wage and Hour Division regularly published opinion letters to provide guidance to employers and employees.  The opinion letters were responses to individual circumstances that were presented for analysis through requests by employers and employees.  During the most recent Bush Administration, the Wage and Hour Division made a concerted effort to provide more detailed legal analysis in opinion letters.  In recent years, some parties that were engaged in litigation requested opinion letters concerning circumstances similar to those arising in litigation.  That led to assertions that the Wage and Hour Division was being used by parties in litigation to influence pending litigation.

When it issued the Administrator’s Interpretation, the Wage and Hour Division announced a new policy of issuing interpretations that “will set forth a general interpretation of the law and regulations, applicable across-the-board to all those affected by the provision in issue,” with a goal of “clarifying the law as it applies to an entire industry, a category of employees, or to all employees.”  The Wage and Hour Division described this approach as “a much more efficient and productive use of resources” than issuing opinion letters.   

Effect of Administrator’s Interpretation

Courts are not bound by the Administrator’s Interpretation, but it may well be relied upon by courts to support the conclusion that mortgage loan officers may qualify for overtime pay.  Certainly, it at least undermines employers’ reliance in the future on the previously issued opinion letters that supported treating mortgage loan officers as exempt administrative employees. 

The Administrator’s Interpretation will also likely be used by employees in litigation to support arguments that those who sell financial products are nonexempt.  The FLSA regulations state that financial services employees may satisfy the administrative exemption if their duties include, among other activities, advising customers about financial products, but also state that “an employee whose primary duty is selling financial products does not qualify for the administrative exemption.”  The Administrator’s Interpretation will likely be cited to support the argument that many of the activities of financial services representatives are incidental to a primary duty of selling financial products.

Similarly, the Administrator’s Interpretation may be cited by any office-based employees who have substantial sales responsibility to support a claim for overtime pay.  

Liability Risks

Potential liability in cases involving misclassification of employees can be substantial.  A mortgage loan officer, for example, who works long hours and regularly receives large commissions may alone be able to claim that significant amounts of overtime pay were not paid.  If a claim is pursued on behalf of numerous employees, the potential exposure is multiplied many times over.  The damages may be much greater than the unpaid overtime itself, since awards of overtime pay are presumptively subject to doubling under the FLSA’s liquidated damages provision.  The statute of limitations is at least two years and can be three years in some circumstances.  Finally, successful plaintiffs’ lawyers can obtain awards of their attorney’s fees from the employers that they sue.  

Next Steps

Employers of mortgage loan officers and other office-based employees that have substantial sales responsibilities should review their compensation practices in light of the Administrator’s Interpretation and consider modifications if they have treated such employees as ineligible for overtime pay.  If employers decide to change their compensation practices, they also need to determine what methodology to adopt and how to announce and implement changes.