In a victory for the Mortgage Bankers Association (“MBA”), a federal Court of Appeals has vacated an “Administrator’s Interpretation” issued in 2010 by the U.S. Department of Labor Wage and Hour Division (“DOL”) regarding the non-exempt status of mortgage loan officers.[1] This court decision reinstates a prior Opinion Letter issued by the DOL in 2006 that had concluded loan officers in the mortgage banking industry generally may qualify as exempt from overtime under the administrative exemption of the federal Fair Labor Standards Act (“FLSA”). MBA had challenged the contrary 2010 Interpretation because it had been issued by the DOL without first conducting the “notice and comment” rulemaking process required under the Administrative Procedure Act (“APA”). The Appeals Court agreed with the MBA, but took no position on the merits of whether mortgage loan officers may in fact qualify under the administrative exemption to be exempt from the payment of overtime wages. Thus, the DOL may subsequently readopt the 2010 Interpretation after conducting the proper rulemaking procedures. In the interim, however, mortgage industry employers may choose to rely on the 2006 Opinion Letter to potentially escape overtime liability regarding their loan officers if they follow the guidance of that letter. 

Procedural History and Background[2]

The 2006 DOL Opinion Letter
Under the FLSA, employers are generally required to pay overtime wages to employees who work more than 40 hours per week.[3] However, the FLSA provides several exceptions to this general rule, including for employees “employed in a bona fide executive, administrative, or professional capacity…”[4] In September 2006, the DOL issued an opinion letter at the MBA’s request  addressing application of the administrative exemption to loan officers in the mortgage banking industry (the “2006 Opinion Letter”).[5]

The MBA’s request set forth various duties typically performed by loan officers, and asked DOL to assume that these loan officers spent less than fifty percent of their working time on “customer-specific persuasive sales activity.”[6] Applying the three components of the administrative exemption adopted in the FLSA regulations in 2004,[7] the 2006 Opinion Letter concluded that loan officers described in the MBA’s request “ha[d] a primary duty other than sales, as their work include[d] collecting and analyzing a customer’s financial information, advising the customer about the risks and benefits of various mortgage loan alternatives in light of their individual financial circumstances, and advising the customer about avenues to obtain a more advantageous loan program.”[8] Therefore, these loan officers, if paid on a “salary basis,” would qualify for the administrative exemption under the FLSA and they would not be entitled to be paid overtime compensation for working in excess of 40 hours per week.

The 2010 Administrator’s Interpretation
Approximately 3 ½ years after issuing the 2006 Opinion Letter, the DOL, under a different administration, reversed course and issued an “Administrator’s Interpretation” in March 2010 (the “Interpretation”) expressly withdrawing the 2006 Opinion Letter and concluding that employees who perform the typical job duties of mortgage loan officers do not qualify for the “administrative employee” exemption.[9] The 2010 Interpretation determined that a loan officer’s primary duty is not “administrative” work “directly related to the management or general business operations of the employer” under the test set forth in the 2004 regulations, and instead concluded that “a mortgage loan officer’s primary duty is making sales.”[10] The Interpretation also concluded that because individual homeowners do not have management or general business operations, “work for an employer’s customers does not qualify for the administrative exemption where the customers are individuals seeking advice for their personal needs, such as people seeking mortgages for their homes.”[11] Therefore, an employer would not be able to use the administrative exemption as a basis for avoiding the payment of overtime wages to mortgage loan officers.[12]

The District Court Proceedings
In January 2011, the MBA sought judicial review of the 2010 Administrator’s Interpretation in the United States District Court for the District of Columbia, asserting that the DOL violated the APA[13] by issuing an Interpretation contrary to its prior position on the matter without first providing notice of the change and an opportunity to comment on it. The MBA also contended the Interpretation was arbitrary, capricious, and inconsistent with the regulation.

The District Court upheld the Interpretation.[14] Although the District Court recognized the general rule that if an agency’s interpretation of a statute or rule “itself carries the force and effect of law” as an “authoritative departmental interpretation,” then it cannot be changed without notice and comment, the District Court also recognized what it believed to be an exception to that rule if the challenging party did not “substantially and justifiably” rely upon a “well-established agency interpretation.” The District Court found this exception applicable because DOL’s prior interpretation was only in effect for a period of four years, and the MBA’s members had not substantially and justifiably relied on it to their detriment, in part because employers would not be liable for any damages resulting from their good faith reliance on the 2006 Opinion Letter.[15] The District Court also ruled that the 2010 Interpretation was not inconsistent with the FLSA regulations and was not arbitrary, capricious, or otherwise unlawful. 

The Court of Appeals Decision
The United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) reversed, holding that DOL violated the APA by issuing the conflicting 2010 Administrator’s Interpretation without providing prior notice of the change and an opportunity to comment on it. The Appeals Court held that the 2006 Opinion Letter was a definitive agency interpretation of the statute, and that “[o]nce a court has classified an agency interpretation as such, it cannot be significantly revised without notice and comment rulemaking.”[16] The Appeals Court thus remanded the case to the District Court with instructions to vacate DOL’s 2010 Interpretation, thus in effect reinstating the 2006 Opinion Letter.

The D.C. Circuit rejected the District Court’s view that notice and comment is not required to change a definitive agency interpretation unless the challenger also shows that it “substantially and justifiably” relied upon the earlier interpretation. The Appeals Court held that “reliance is but one factor courts must consider in assessing whether an agency interpretation qualifies as definitive or authoritative.”[17] Either the agency’s existing interpretation is definitive or it is not, and if it is then no separate reliance showing is required.[18]

The D.C, Circuit did not, however, address the MBA’s contention that the Interpretation was arbitrary, capricious, or inconsistent with the regulation. Thus, the DOL is not, by force of the decision itself, precluded from revoking the 2006 Opinion Letter and issuing a new interpretation after conducting the proper notice and comment rulemaking process under the APA. A new DOL interpretation deeming loan offices non-exempt, however, would be subject to a separate court challenge, in which the court would have to address the validity of the interpretation on the merits under the applicable standards of review for such agency decisions.

Conclusion
The D.C. Circuit decision confirms that DOL remains bound by the 2006 Opinion Letter, and may not enforce a contrary view against employers unless and until it follows the proper notice and comment procedures under the APA to make such a change. Accordingly, while the D.C. Circuit’s decision does not address or determine whether a loan officer may in fact qualify for the administrative exemption under the FLSA, the decision should allow employers for the time being to rely on the 2006 Opinion Letter as DOL’s authoritative position, and thus invoke the defense under the applicable provisions of the Portal to Portal Act to escape liability if they act in compliance with that Opinion Letter. Of course, any individual employer considering reclassification of its loan officers one way or the other in response to the D.C. Circuit decision should seek advice of counsel as to the particular circumstances and the proper methods for doing so.

Notes:

[18]  The D.C. Circuit relied on two prior decisions from its Circuit, Paralyzed Veterans of America v. D.C. Arena L.P., 117 F.3d 579 (D.C. Cir. 1997), and Alaska Professional Hunters Ass’n v. FAA, 177 F.3d 1030 (D.C. Cir. 1999), in support of its positions that once an agency has given its regulation a definitive interpretation, then it cannot significantly revise that interpretation without notice and comment. However, the Appeals Court noted a split among the Circuits and that “[t]he First, Second, Fourth, Sixth, Seventh, and Ninth Circuits agree that changes in interpretations do not require notice and comment because both the original and current position constitute interpretive rules.” The  Government may seek further review to resolve this split of authority.