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Overtime pay for home lenders in stunning upset to past U.S. law

New federal interpretation reverses past policy. Banks face implications in multiple areas

Reversing prior cases and its own regulatory guidance, the U.S Department of Labor (DOL) now says that most mortgage lenders do not qualify for the Fair Labor Standards Act’s (FLSA) administrative exemption to overtime pay. In a March 24 Administrator’s Interpretation, DOL states that mortgage lenders are typically engaged in “production work,” as distinct from “office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers,” which is a requirement of the administrative exemption.

This is the Obama administration’s first FLSA Interpretation, and demonstrates a much more restrictive approach to the “white collar” exemptions that banks have long relied on. This Interpretation will have an impact that goes well beyond mortgage lenders.

A bit of history

The FLSA was enacted during the Depression. The intent was to require the payment of overtime pay—time and a half the regular hourly wage—for hours worked in excess of 40 a week. The Act recognizes some exemptions to the overtime rule, known collectively as the “white collar” exemptions. Banks have traditionally relied on one of these—the administrative exemption—to avoid paying overtime to lenders.

In determining whether the exemption applies, the actual job title has meant little; the key is the “primary duty” actually performed. The primary duty of the administrative exemption is the performance of office or non-manual work directly related to the management or general business operations of the bank or its customers. To qualify for the exemption, the employee must also be paid at least $455 a week “on a salary basis.”

This “salary basis” requirement tripped up many of the larger players in the financial services industry who were paying their brokers and financial consultants on a commissions-only basis. In 2006, Morgan Stanley, Smith Barney, and UBS, amongst others, paid multi-million dollar settlements in class actions alleging failure to pay overtime.

However, these cases did not question whether the employees met the “primary duty” part of the exemption test. In commentary on revisions made to overtime regulations in 2004, DOL specifically addressed the application of the duties requirement in the financial services industry. Employees whose work includes “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” are exempt. This guidance was confirmed in an Opinion Letter in 2006 on the application of the administrative exemption to mortgage loan officers.

The 2006 Opinion Letter on mortgage loan officers has now been withdrawn and replaced by the new Interpretation. The 2004 guidance, which applies to financial industry positions generally, has been seriously undermined.

What happens now?

Banks have options, none of them ideal. Mortgage lenders, perhaps with some adjustment to their duties, may be able to fit within another of the overtime exemptions. Or management can bite the bullet and re-classify mortgage lenders as non-exempt.

Here are issues to consider:

• Outside sales: Is the employee “customarily and regularly engaged away from” the bank, “making sales, or obtaining orders or contracts for services”? DOL issued an Opinion Letter applying the outside sales exemption to mortgage loan originators who met with clients at the client’s home or other locations away from the bank. Any contact with the client by phone, mail, or email was adjunct to these in-person contacts. Note that the lender’s office in his/her own home is included as the “employer’s place of business.”

• Executive exemption:
Does the mortgage lender lead a department of two or more lenders and loan processors, and is his/her primary duty the management of that department? In this case, the executive exemption might apply. However, that would only be so if the employee “customarily and regularly directs” the work of the employees reporting to him/her. In addition, the employee must have the authority to hire and fire, or make recommendations on hiring and firing that are given “particular weight.”

Biting the bullet

The problem with reclassifying a group of employees as non-exempt is that it raises a red flag. The employee is bound to ask, “Why was I not being paid overtime before?”

Plaintiffs’ lawyers have latched onto the FLSA as a fruitful source of claims, and no doubt are on the alert for the fallout from this recent Interpretation. Perhaps there is a brief window of opportunity to make the change now, and limit overtime due and penalties to the period since March 24 when the new Interpretation was issued.

Other ways to minimize exposure:

• Managing hours: Make sure mortgage lenders do not work over 40 hours a week. However, this is increasingly difficult to monitor in the “Blackberry” age, when technology blurs the lines between work and private life.

• Fluctuating work week:
If the number of hours worked varies both below and above 40, the bank may be able to pay a lower amount in overtime, as long as it pays a fixed weekly amount even for those weeks the employee works less than 40 hours. The fluctuating work week formula is complicated and requires a week-by-week recalculation of the overtime rate, so it may not be attractive to all.

Wider implications

Recently, the industry received a potential taste of what’s to come. In a case decided just one week after the Administrator’s Interpretation was issued, a federal court in Minnesota found that brokers working for a unit of the Royal Bank of Canada were not exempt administrative workers, because their primary duty was selling financial products. (In Re RBC Dain Rauscher Overtime Litigation, Civil No. 06-3093 (JRT/FLN), March 31, 2010).

Of particular interest is the court’s analysis of one senior broker’s activities. David, with over 40 years’ experience, spent his time advising clients, rather than selling them products. In denying the administrative exemption, the court reasoned that David’s work could not be related to his clients’ “general business operations” as his clients were individuals, not corporations or other business entities.

This decision may indicate the outer limit of the new Interpretation. In defining the brokers’ duties as “producing sales” and distinguishing that from administrative work related to the general business operations of the employer or its customers, the case expands the Interpretation beyond mortgage lenders to other workers in the financial industry. In determining that, even where the employee’s duties are not merely producing sales, but advising clients on their investments, the exemption does not apply where the clients are individuals rather than business entities. However, commercial lenders may then qualify for the administrative exemption after all, as their primary duty—advising commercial clients—is related to the clients’ general business operations.

If this tortuous analysis is confusing, that is because it is!

The Administrator’s new Interpretation of the administrative exemption as applied to the financial sector turns away from established precedent and distorts the meaning of guidance banks have relied on for years.

Marian Exall

Marian Exall ( is an employment lawyer and HR professional with more than 25 years' experience advising banks and other employers on compliance issues. She is a principal and co-founder of Employment Law Compliance, Inc. which provides HR compliance solutions to banks exclusively through the American Bankers Association. She is a frequent speaker and writer on human resources compliance in the banking industry, including in ABA Banking Journal, on ABA Telephone Briefings, and at national and state bankers' association conferences. For more information on this or other employment compliance topics, please call Employment Law Compliance at 866-801-6302 or go to

Marian also writes fiction. Her latest novel is a mystery called A Slippery Slope. For more information and to order, go to

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