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Page 1: FLSA Overview: Overtime Compensation for Mortgage Loan ... · FLSA Overview: Overtime Compensation for ... underwriter was expected to evaluate each loan application under the

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FLSA Overview:

Overtime

Compensation

for Mortgage

Loan Officers

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OVERTIME STATUS OF MORTGAGE LOAN OFFICERS UNDER FLSA (Prepared in collaboration with Employment Law Compliance)

Contents:

General Comments

o Differing Treatment for Employees with the Same Title o Application of Interpretation to Other Positions o Officer Status

Ways Loan Officers May Retain Exempt Status

o Administrative Exemption Basics o Commercial vs. Individual Customers o Other Potential Exemptions

Issues Arising from Changing to Non-Exempt Status

Computing Overtime

A. GENERAL COMMENTS

On March 24, 2010, the Department of Labor‟s Wage and Hour Division Deputy Administrator Nancy Leppink issued Administrator’s Interpretation No. 2010-1 that, in effect, overturns agency guidance on how mortgage officers and lenders are exempt from the overtime requirements of the Fair Labor Standards Act under the administrative exemption from overtime. The industry was successful in obtaining guidance in the 2004 revisions to the FLSA regulations indicating that mortgage lenders (and others performing such duties regardless of titles) were generally exempt employees under the administrative exemption so long as their primary duty was not was not selling the employer‟s products. In addition, during the Bush Administration, WHD issued two Opinion Letters that supported this position supported this position.

WHD‟s action on the 24th formally rescinded the two Opinion Letters and determined that generally

mortgage loan officers are, in fact, selling their employers‟ financial products. The Interpretation was based on a review of case law that ABA believes presents a distorted view of the overall current judicial positions on the law. Read the letter.

Because the FLSA requires that exemption determinations are based on the duties and responsibility of each specific position, job titles don‟t matter. Each position requires its own review. With the potential legal liability the banking industry now faces as a result of the DOL interpretation, ABA recommends that banks consult with their legal counsel to determine the appropriate course of action. Technically, the exemption standards changed on March 24, 2010, and Bank are liable for unpaid overtime compensation from that date to the present. Whether to reconstruct hours worked during that time period and make back wage payments, will turn on each individual bank’s risk assessment. 1. Differing Treatment for Employees with Same Title It is perfectly acceptable under the FLSA for employees with the same title to be exempt from the payment of overtime based on different FLSA exemptions. Similarly, employees with the same title may be exempt or non-exempt. As stated above, titles are irrelevant to the determination of exempt status, and you are not obligated to establish different titles. However, from a practical perspective, given the different compensation and timekeeping methods, banks may be better served by having different job titles for implementation and administrative purposes.

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2. Application of Interpretation to Other Jobs WHD‟s March 24

th interpretation specifically addresses mortgage loan officers. However, the principles it

espouses concerning the production vs. administration dichotomy could well apply beyond the mortgage loan officer category.

Loan Underwriters. The March 24th interpretation doesn‟t specifically address underwriters.

However, in November 2009 the Second Circuit in Whalen v. J.P. Morgan held that a loan underwriter employed at J.P. Morgan Chase did not qualify for the administrative exemption from the overtime requirements of the Fair Labor Standards Act because his work involved “the „production‟ of loans — the fundamental service provided by the bank,” rather than exempt administrative work. (The bank sought review by the Supreme Court, and ABA filed a friend-of-the-court brief in the case, but the Supreme Court declined to review it.)

The Second Circuit described the employee‟s duties as follows: “[He] evaluated whether to issue loans to individual loan applicants by referring to a detailed set of guidelines, known as the Credit Guide, provided to him by Chase. The Credit Guide specified how underwriters should determine loan applicant characteristics such as qualifying income and credit history, and instructed underwriters to compare such data with criteria, also set out in the Credit Guide, prescribing what qualified a loan applicant for a particular loan product. . . An underwriter was expected to evaluate each loan application under the Credit Guide and approve the loan if it met the Guide's standards. If a loan did not meet the Guide's standards, certain underwriters had some ability to make exceptions or variances to implement appropriate compensating factors.”

Credit analysts. The Department of Labor did not address the exempt status of credit analysts in connection with this recent Administrator‟s Interpretation. Credit analysts may qualify for the administrative exemption, but that will turn on whether those individuals exercise “independent judgment and discretion.” (See the links in the attached exemption chart for a discussion of this duty.) The exempt status of credit analysts varies widely from one bank to another. The same analysis would apply to loan collectors.

Loan Processors. The recent interpretation did not specifically address the exempt status of loan processing employees. Those employees theoretically could qualify for the administrative exemption, but that will rarely be the case. Loan processing employees do not exercise discretion, typically, as that term in defined by DOL.

Insurance agents. The rationale contained in the Interpretation would apply to insurance agents offering insurance products to individuals. We have already seen the Interpretation extend to financial advisors who support individuals. We haven‟t seen DOL move against insurance agents yet, but the interpretation would appear to apply.

3. Officer status within a bank has no bearing on exemption status. 4. Volunteer activities. If an employee is volunteering with a civic organization, for the purposes of prospecting for business, sales work, or public relations for the Bank, that time will nevertheless be viewed as “hours worked” by the Department of Labor. While we understand characterizing this time as “volunteer” activities, for most community banks those activities directly relate to sales efforts, and therefore hours worked will become an issue.

B. WAYS LOAN OFFICERS MAY RETAIN EXEMPT STATUS

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1. Administrative Exemption Basics To qualify for the administrative employee exemption, all of the following tests must be met:

The employee must be compensated on a salary basis (as defined in the regulations) at a rate not less than $455 per week;

The employee‟s primary duty must be 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 employee‟s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

Employees who are compensated wholly by commissions will not satisfy any exemption except the outside sales exemption. To qualify for other exemptions, such employees must receive a guaranteed

draw of $455/week to satisfy the salary basis test.

“Primary duty” means the principal, main, major or most important duty that the employee performs. Determination of an employee‟s primary duty must be based on all the facts in a particular case, with the major emphasis on the character of the employee‟s job as a whole.

“Directly Related to Management or General Business Operations.” To meet the “directly related to management or general business operations” requirement, an employee must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example from working on a manufacturing production line or selling a product in a retail or service establishment. An employee may qualify for the administrative exemption if the employee‟s primary duty is the performance of work directly related to the management or general business operations of the employer‟s customers. Thus, employees acting as advisors or consultants to their employer‟s clients or customers — as tax experts or financial consultants, for example — may be exempt.

“Discretion and Independent Judgment.” In general, the exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct and acting or making a decision after the various possibilities have been considered. The term must be applied in the light of all the facts involved in the employee‟s particular employment situation, and implies that the employee has authority to make an independent choice, free from immediate direction or supervision. The term “matters of significance” refers to the level of importance or consequence of the work performed. An employee does not exercise discretion and independent judgment with respect to matters of significance merely because the employer will experience financial losses if the employee fails to perform the job properly.

2. Serving Commercial vs. Individual Customers Under the FLSA regulation on the administrative exemption, an employee may be performing work associated with the general business operations if he/she is serving the employer‟s customers. The interpretation is the first time DOL has distinguished between individual and commercial customers, when interpreting the administrative exemption standard. Since individuals cannot have “general business operations,” DOL is now making this distinction.

Banks will need to evaluate the primary duty for all of your lenders, and distinguish between their work for individual customers and their work for business customers.

For a loan officer to be exempt under the administrative exemption, his/her primary duty would need to be supporting commercial customers. Typically, an employee‟s “primary duty” means the activity he spends

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most of his time on. In addition, the employee would have to exercise the discretion required by the administrative exemption.

If an employee‟s primary duty involves supporting individuals, then the administrative exemption will not be available. Mortgage and agricultural loans could be for individuals or for businesses, depending upon the scenario.

Regardless of loan approval authority, if the mortgage loan officer focuses on satisfying individual customers, he/she will not satisfy the administrative exemption standard. However, if a loan officer has authority of $50,000 or more (which we would expect), that authority level would likely be sufficient to satisfy the discretion standard, assuming other exemption requirements are met.

3. Other Potential Exemptions Other potential exemptions include the Outside Sales Exemption, the Executive Exemption and the Highly-Compensated Employee Exemption. We have attached a chart that summarizes the requirements of the various exemptions along with links to DOL summaries about them. If an employee qualifies for one of these exemptions, they will not have to maintain time records.

Outside Sales Exemption. This exemption requires that the employee makes sales customarily and regularly away from “employer’s place of business” and that includes home or any other fixed site. The outside sales exemption is available even if the employee is paid solely on commission and even if the employee does not exercise independent judgment and discretion. Importantly, the outside sales exemption will turn on where the employee actually works, as opposed to what the bank says in the position description, policies and procedures or other documents. Mandating that the employee NOT spend time at a branch will not change that equation. The questions are: (1) where does the employee actually work, and (2) what type of work is actually performed by the employee.

o That said, an individual could have a desk and an office and still qualify for the outside sales exemption. Work performed in the office will be considered “directly related” to outside sales activity if the tasks involve planning for outside sales activity or documenting the results of outside sales activity.

Executive Exemption. This exemption requires that (1) the employee‟s primary duty is managing the business or subgroup, (2) he/she regularly supervises at least 2 full-time employees, and (3) has authority/recommendation to hire/fire.

o If the employee has as his or her primary duty, mortgage lending, then the executive exemption would not apply, even if the individual directs the work of two or more employees. So the issue is defining the primary duty for these individuals, who serve in multiple roles.

Highly Compensated Exemption. This exemption requires that the employee be paid at least $100,000 per calendar year ($455 per week on a salary basis), and perform one of duties of an exempt executive, administrative or professional. For someone to qualify for that exemption in calendar year 2010, their earnings in calendar year 2010, will need to meet the $100,000 threshold.

If, as you get to the end of calendar year 2010, you find that employee is below that threshold, to maintain the exemption the bank has to make up the difference between what the employee has

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earned and $100,000. In other words, if you get to the end of the year, and an employee is at $92,000, you could pay them makeup pay of $8,000 and maintain the exemption for 2010. If you do not supply the makeup payment, the individual will be non-exempt for all of 2010, and you would need to compute overtime compensation earned in the year, accordingly.

C. ISSUES ARISING FROM CHANGING TO NON-EXEMPT STATUS

1. Restricting Overtime An employee is not entitled to any overtime compensation if he/she doesn‟t actually work more than 40 hours in a work week. If a loan officer‟s duties can be managed to stay within that 40 hour threshold, no overtime compensation will be required. But to achieve this, banks will need to

Implement a clear policy and communicate that policy, whereby mortgage loan officers MUST obtain advanced supervisory approval before working more than 40 hours in a work week;

Implement a policy clearly defining the time that needs to be reported by mortgage loan officers as hours worked;

Notify its management team, that managers cannot permit individuals to fail to record any and all work time.

This combination of policies and management practices will limit overtime hours worked by mortgage loan officers, and thereby limit overtime compensation obligations.

If an employee performs work contrary to this policy, such as responding to emails after hours, the employee must still be paid for all time worked. The bank can discipline the employee, up to and including discharge, for a violation of the bank policy. However, again, the employee has to be paid for all hours worked.

2. Fluctuating Workweek The Fluctuating Workweek Pay Plan is a technical Plan available under the FLSA and defined in DOL regulations at 29 C.F.R. § 778.114.

Banks can qualify for the fluctuating workweek and still pay mortgage lenders on a commission basis or guaranteed draw plus commissions as follows. If employees understand that any salaried payment and any commission payment is intended to reward them for all hours worked, then the required overtime premium will be calculated at “half time” rates. The salary and the commissions will serve as the base compensation for all hours worked, including overtime hours. Therefore, the overtime payment will consist of the additional “half time” of the effective hourly rate of pay for each overtime hour worked.

The requirements of this Pay Plan have been interpreted differently by federal courts across the country. Therefore, prior to implementing this Pay Plan, the bank should obtain specific advice from employment law counsel.

D. CALCULATION OF OVERTIME FOR NON-EXEMPT LOAN OFFICERS

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Non-exempt employees will be entitled to overtime compensation, based upon any salary, guarantee, and commissions earned for work performed in the week. Compensation may be paid on a weekly or monthly basis. Commissions cannot be considered “discretionary” and will factor into the overtime premium due. Since commissions will vary and hours worked will vary, there is no permissible way to maintain a consistent regular rate of pay, from one month to another.

Non-exempt loan officers are entitled to minimum wage in all work weeks. If an employee only works a certain number of hours, for example 30 hours, you only need to pay them for 30 hours. No overtime would be required because overtime is required only for hours worked in excess of 40 hours/week.

1. Calculating the Hourly Base Compute the total compensation earned by the employee for work performed in a given week or a given month, and then compare total compensation against total hours worked in the period to compute the regular rate of pay. For loan officers compensated on the basis of commission only, the hourly rate is computed by taking total commissions earned in the period and dividing that by the total number of hours worked in that period.

2. Calculating Overtime Overtime pay is calculated based upon the base and commission payments received by the employee, for work performed during the week(s) or month in question. The overtime rate is one-half of the effective hourly rate of pay of the employee and is paid for each hour worked in excess of 40 hours per week.

Example: Assume a loan officer is paid a guaranteed draw of $500 per week, and commissions based on a schedule to the extent that year-to-date commissions earned by the loan officer exceeds year-to-date guaranteed draws paid to the loan officer. You may deduct guaranteed draws and overtime prior to making commission payments, if your policy provides for such treatment.

So, if the loan officer receives the $500 per week draw and receives commissions of $500 for work performed in that same week, his/her total compensation for the week would be $1,000. If the person worked 50 hours in the week, you would compute the regular rate of pay by taking the $1,000 and dividing it by 50 hours, to arrive at a regular rate of $20 per hour. The employee would be entitled to half that regular rate ($10 per hour) for each of the 10 overtime hours worked, or an additional $100 for that work week.

When mortgage loan officers receive their quarterly incentive, the bank will have to compute the overtime premium due on that quarterly incentive, based upon the number of overtime hours worked in that calendar quarter. By moving to non-exempt status, overtime premiums are also due on these quarterly commissioned or incentive payments.

Unfortunately, the overtime payment due will vary with the hours worked by employees and the compensation received by those employees. Therefore, a manual calculation will be necessary. Overtime compensation needs to be paid, at the time the figure is capable of being computed. Therefore, when commission or incentive payments are made (weekly, monthly, quarterly, etc.), the compensation figure will be known, the overtime hours worked will be capable of calculation, and the overtime premium should be calculated and paid. Any overtime premium due on hourly, salary, or draw payments, should also be made at the time the compensation is delivered to the non-exempt employee.

3. Deductions Prior to Commission Payments or in Subsequent Period You may deduct salary and overtime compensation, prior to paying commissions to loan officers. The

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commission payment is a function of contract, and the bank has the discretion to define when commission payments will be extended to employees. In addition, you may recover draw advances from commissions earned in subsequent periods. The issue is to make sure that your commission policy is clear in terms of treatment and recovery of these draws.