Do New Overtime Rules Change the Landscape for Mortgage Loan Officers and Loan Officers?

Dickinson, Mackaman, Tyler & Hagen, P.C.
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Dickinson, Mackaman, Tyler & Hagen, P.C.

In May and June, the U.S. Department of Labor’s Wage and Hour Division (WHD) published two Fair Labor Standards Act final rules addressing overtime pay. The first rule, published and effective on May 19, 2020, amended the FLSA overtime exemption for commissioned employees employed by retail or service establishments. This exemption is commonly known as the “inside sales exemption.” The second rule, published on June 8 and effective on Aug. 7 made changes to the FLSA’s “fluctuating workweek” method of paying overtime to salaried, nonexempt staff.

The day after the inside sales exemption final rule was published in the Federal Register, I began hearing from banks and other financial institutions about the applicability of this exemption to their operations. The same thing occurred in June after the fluctuating workweek rule was published. Why were these financial institutions so interested in these new FLSA rules? Two words: loan officers. Specifically: mortgage loan officers.

Whether mortgage loan officers, and other loan officers, are exempt from overtime or not has been a hot topic for many years. The WHD’s stance on that question has shifted over time. Currently, the WHD considers most mortgage loan officers/loan officers to be subject to the FLSA’s overtime provisions (in other words, they are nonexempt). This means they must keep records of their work hour and get overtime premium pay when they work more than 40 hours in a workweek. Financial institutions, and many mortgage loan officers/loan officers themselves, prefer that they be exempt from overtime, paid a set weekly salary (or salary plus commissions/incentives), and not have to keep records of hours worked. Some financial institutions reluctantly complied with the WHD’s present stance on mortgage loan officers/loan officers, others actively ignored it and accepted the legal risk, and still others are unaware of the issue altogether. Hopes run high whenever the DOL issues a new rule or guidance document that comes anywhere near this issue.

Let’s look closely at what happened, because it will set the stage for where things stand after the new rules.

BACKGROUND

In 2006, WHD published an opinion letter stating, under certain conditions, mortgage loan officers could be considered FLSA-exempt under the Administrative white-collar exemption. That 2006
letter clarified longstanding confusion on whether the Administrative exemption could possibly apply to these employees. Many financial institutions relied on that letter and classified mortgage loan officers as exempt, or took heart that the mortgage loan officers they were treating as exempt were now truly exempt.

In 2010, the Obama DOL reversed this Bush era guidance, rescinding the 2006 letter and replacing it with a new Administrator’s Interpretation, 2010-1, that said it was virtually impossible for mortgage loan officers to meet the duties tests for the Administrative exemption because their primary duty was selling loans to individuals and related work incidental to those sales. It said, “The typical job duties of a mortgage loan officer comprise a financial services business’ marketplace offerings, the selling of loan products.” This statement seemed to apply equally to other loan officers at financial institutions (those who sell consumer and agricultural loans) and not just those selling mortgages. To be exempt under the Administrative exemption of the FLSA, a financial institution employee’s primary duty must be “related to the management or general operations of the employer’s customers ... [not] selling the employer’s financial products.” Hence, virtually all loan officers at a bank were not to be exempt from the FLSA — at least not under the Administrative exemption. At present, this remains the publicly stated position of the WHD.

In response to the 2010 AI, many financial institutions converted their mortgage loan officers from exempt to nonexempt, and some were prescient enough to convert other loan officers, too.

Some of those mortgage loan officers/loan officers were paid using the FLSA’s fluctuating workweek method for paying overtime. This option, which I will cover in detail later, pays a nonexempt
employee a guaranteed salary, no matter how many or few hours the employee works in a workweek, with additional overtime premium paid at .5 times the employee’s regular rate of pay for the week. However, because of a statement the DOL made in the preamble to a 2011 FLSA final rule, questions were raised regarding the availability of the fluctuating workweek method in situations where the employee received bonus, commission or incentive payments in addition to the salary and overtime pay. Specifically, the DOL asserted that such payments would be “incompatible” with the fixed salary requirements of the fluctuating workweek regulation.

Mortgage loan officers often received significant commission, bonus and incentive payments for selling mortgages. While not part of the final rule itself, the preamble statement in 2011 was enough to alarm financial institutions, and, out of caution, many institutions changed mortgage loan officers to hourly pay with time and one-half for overtime work. Courts were split on whether to apply the DOL’s preamble statement or not.

Given this background, banks and other financial institutions eagerly looked at both of these newly issued rules of the WHD as a panacea for all that had been ailing them for the last 14 years. After reviewing the rules and consulting with our firm’s Banking Practice Group, and after much consideration, I believe only one of the new rules may be applied to mortgage loan officers/loan officers, but the other is questionable. Let’s look at the questionable one first.

MOST BANKS NOT LIKELY TO BE
CONSIDERED RETAIL ESTABLISHMENTS

The inside sales exemption, found in Section 7(i) of the FLSA, provides an exemption from overtime for any employee who meets all three elements of this test:

  1. The employee must work for a retail or service establishment.
  2. The employee’s weekly regular rate of pay exceeds one and one-half times the FLSA minimum wage.*
  3. More than half of his/her compensation for a representative period (not less than one month) represents commissions on goods or services.

A key criteria for the inside sales exemption is that the employer must be a retail or service establishment. Prior to the May 2020 final rule, the regulations contained a list of establishments that did not meet the FLSA’s tests for “retail and service,” which included banks. Thus, it used to be that the inside sales exemption was not applicable to banks, period. Interestingly, other types of financial institutions were not on the “not retail” list.

The May 2020 Final Rule eliminated two lists from the regulation — the list of businesses with “no retail concept” and the list of businesses that “may be recognized as retail.” Courts had criticized these lists as incomplete and arbitrary. The WHD’s purpose of dropping these lists in the May 2020 rule was to make the inside sales exemption potentially available to all businesses, which would allow consideration of industry changes over time. The fact that banks were no longer patently ineligible for the retail sales exemption caught the interest of HR professionals in the banking industry, a number of whom contacted me for my thoughts. Several told me they were anticipating using the inside sales exemption for paying mortgage loan officers.

Those plans and the excitement the May 2020 rule generated in the banking community is misplaced. Although this rule no longer prohibited banks from using the inside sales exemption outright, banks must still meet the remaining criteria to be a retail or service establishment — criteria which did not change in the new rule. The WHD has devoted an entire section of its rules to this exemption. Specifically, as defined in 29 CFR § 779.24, a retail or service establishment:

  • Must engage in the making of sales of goods or services; and
  • 75% of its sales of goods or services, or of both, must be recognized as retail in the particular industry; and
  • Not over 25% of its sales of goods or services, or of both, may be sales for resale.

The FLSA generally does not consider sales to other businesses to constitute retail sales. If WHD applies this standard to banks, then commercial and farm loans would not be counted to meet the 75% of sales recognized as retail. Also, mortgages that are resold to another financial institution would count against the 25% ceiling on sales for resale. Whether a particular bank meets the criteria to be a retail or service establishment is determined by an analysis of the bank’s loan portfolio.

At present, there is no WHD guidance or statement on the applicability of this exemption to banks. I have requested such guidance but have yet to receive it. I am sorry to dampen enthusiasm over this new rule, but until we get better direction from the WHD or the courts, banks would be wise not to use the retail or service establishment overtime exemption for mortgage loan officers and loan officers.

Even if a bank’s loan portfolio shows that a bank can be a retail or service establishment, to be exempt the mortgage loan officer/loan officer in question must be paid more than 1 1/2 times the minimum wage, and commissions must make up more than half of the mortgage loan officers/loan officers compensation over a representative period of time of at least one month. Some Iowa banks will not be able to meet these criteria, either.

FLUCTUATING WORKSHEET METHOD

The June 2020 WHD final rule holds more promise for banks. Effective Aug. 7, mortgage loan officers/loan officers, and other employees, for that matter — who are classified as nonexempt may be paid using the fluctuating workweek method, even when they are receiving commissions, bonuses and incentive-type payments on top of hourly or salary and overtime pay. This new rule eliminates the confusion created by statements in the preamble to the 2011 FLSA regulations. Now, the rule clearly states, “any bonuses, premium payments, or other additional pay of any kind are compatible with the fluctuating workweek method of compensation.”

This June 2020 final rule also:

  • Clarifies that to be eligible for the fluctuating workweek pay method, the employee’s hours of work must vary from week to week, but there is no requirement that the employee’s hours of work must sometimes fluctuate below 40 hours per week;
  • Requires an employer and employee to have a “clear mutual understanding” that the fixed salary the employee receives is compensation for all hours worked each workweek, although this understanding need not extend to the specific details of the method used to calculate overtime pay;
  • Confirms that the guaranteed salary must be “reasonably calculated” to equal at least minimum wage, when divided by the weekly hours worked;
  • Reminds employers that bonus and incentive payments must be included in the regular rate calculation and overtime calculations unless excludable under section 7(e) of the FLSA;
  • Confirms that the regular rate is determined by dividing the amount of the salary and all non-excludable additional pay received each workweek by the number of hours worked in the workweek (meaning the regular rate must be recalculated each week in which overtime is worked); and
  • Reiterates that payment for overtime hours at one-half the regular rate satisfies the overtime pay requirement (because the set salary is intended to cover straight time pay for all hours worked).

It is important to keep in mind that the fluctuating workweek pay method is not a FLSA exemption. It is an alternative method for paying nonexempt employees who are eligible for overtime pay. The guaranteed salary paid under the fluctuating workweek method must always equal at least minimum wage, overtime hours must be paid at the half the regular rate (based on the total compensation divided by all hours worked in that workweek), and timekeeping records are required.

A drawback to paying nonexempt employees on the fluctuating workweek — which was not changed by the June 2020 final rule — is that the weekly salary must be virtually guaranteed. When using the fluctuating workweek pay method, the weekly salary cannot be reduced, even if the employee works less than 40 hours in any workweek. This is stricter than the rules against docking the weekly salary of FLSA exempt employees. Only one of the seven allowed reasons for docking the salary of an exempt employee is allowed for a nonexempt employee paid on the fluctuating workweek method: no salary need be paid for a week in which the employee provides no work at all. Paid leaves can substitute for all or part of the salary of nonexempt employees paid on the fluctuating workweek method, the same as for exempt employees, because substituting paid leave does not reduce or dock the salary.

CONCLUSION

The changing landscape for correctly classifying and paying mortgage loan officers, and loan officers in general, under the FLSA has certainly kept employers guessing for at least the last 14 years. These new rules are the latest attempt at clarity, but the picture is still cloudy, and is not what bankers would like to see. Financial institutions paying any type of loan officer in a manner other than hourly pay, with a “time and a half” overtime premium for hours worked over 40 in a workweek (and keeping timesheets), would do well to seek the advice of a wage and hour law professional or competent legal counsel to avoid FLSA violations. 

* Note that the retail sales exemption from FLSA is an exemption from overtime provisions only. Employers must still pay minimum wage and maintain accurate daily and weekly hours worked records for employees paid in this manner.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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