The U.S. Court of Appeals for the District of Columbia Circuit recently vacated a 2010 interpretation of federal wage and hour law in which the Department of Labor (DOL) had concluded that mortgage loan officers do not qualify for the "administrative exemption" under the Fair Labor Standards Act (FLSA). In Mortgage Bankers Association v. Harris, the court ruled that the DOL failed to follow the proper rulemaking procedures when it significantly reversed an earlier definitive interpretation of the law in an "agency flip-flop." The DOL had determined four years earlier that mortgage loan officers were properly classified as exempt from the overtime requirements of the FLSA.

The litigation started when the Mortgage Bankers Association (MBA) challenged the Wage and Hour Administrator's 2010 interpretation. The DOL's reversal from its 2006 interpretation led the court to conclude that the agency should have followed the statutorily required procedures for rulemaking contained in the federal Administrative Procedures Act (APA). These procedures include the publication of a proposed rule and an opportunity for public comment.

In its 2006 Opinion Letter, which responded to an opinion request from the MBA, the Wage and Hour Administrator had determined that mortgage loan officers generally fall within the FLSA's "administrative exemption," and are not eligible for overtime premium pay. In 2010, however, the Wage and Hour Administrator concluded that the typical duties performed by mortgage loan officers do not qualify for this exemption, meaning that they are entitled to overtime (unless they fall within another FLSA exemption).

The D.C. Circuit held that a definitive interpretation of a federal regulation is so closely intertwined with the regulation itself that a significant change in the interpretation is tantamount to a repeal or amendment of the regulation. Repeals or amendments of federal regulations require adherence to the APA. Consequently, when the Wage and Hour Administrator reversed its 2006 interpretation without following the APA's notice and comment procedures, it violated federal law. The D.C. Circuit rejected the DOL's argument that MBA members must show substantial and justifiable reliance on the earlier agency interpretation. Based on this reasoning, the court vacated the 2010 interpretation.

The practical impact of vacating the more recent interpretation is that the 2006 Opinion Letter once again becomes the DOL's definitive interpretation of the exempt status of mortgage loan officers. Under the 2006 interpretation, mortgage loan officers fell within the administrative exemption, based on the specific facts and circumstances submitted in the request for that Opinion Letter. The DOL noted particularly that the loan officers described in the request were not performing inside sales, but rather had as their primary duty 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.

The loan officers also qualified for exempt status because their primary duties involved servicing the employer's business by marketing, servicing, and promoting financial products, as well as exercising discretion and independent judgment by assessing alternatives and making recommendations to the customer. Notably, the 2006 interpretation was limited to the loan officers specifically described in the request for the Opinion Letter.

Before employers rely on the 2006 interpretation, they should be aware that unanswered questions remain about how far the D.C. Circuit's ruling will extend. Initially, the government could petition the full D.C. Circuit for en banc review of the ruling and/or petition the U.S. Supreme Court for review. Further, although decisions of the D.C. Circuit often are recognized to carry significant precedential weight in the interpretation of federal regulations, the court itself noted that the principles it applied have not been followed universally. It remains to be seen what impact this decision will have on employers outside the D.C. Circuit's jurisdiction.

Finally, and perhaps most important, it remains to be seen what steps the DOL will take, including formal rulemaking on the question of mortgage loan officers. It seems clear from the 2010 interpretation that the DOL likely will determine that many mortgage loan officers still should be classified as non-exempt and paid overtime. The DOL reportedly is evaluating its options.