Reversing its position and withdrawing a 2006 Wage/Hour Opinion Letter, the U.S. Department of Labor (DOL) has issued an “Administrator’s Interpretation” stating that mortgage loan officers generally do not qualify for the administrative exemption under the federal Fair Labor Standards Act (FLSA).

Given the limited availability of the other white-collar exemptions for financial services employees, the new Interpretation poses a significant hurdle to banks, credit unions, mortgage brokers and other financial institutions seeking to maintain mortgage loan and other financial service officer positions as exempt from overtime.

Overview of the DOL’s analysis

The DOL’s Interpretation is based on its conclusion that the primary duty of loan officers is sales, and on the determination that this activity is not related to the "management or general business operations” of either the employer or the employer's customers, as the administrative exemption requires.

There are four bases for the DOL’s characterization of mortgage loan officers as essentially “sales” personnel. According to the DOL, mortgage loan officers in general (1) are primarily paid by commissions; (2) often receive training in sales techniques; (3) generally are evaluated by the number of loans generated; and (4) are often characterized by their employers as outside salespersons when trying to qualify them for the outside sales exemption (an argument that does not prevail unless the loan officers are out of the office selling most of the time).

Recognizing that heavy emphasis on the sales function can make establishing exempt status problematic, many financial institutions—relying on previous DOL interpretations—had concluded in the past that mortgage loan officers are administrative exempt employees because their primary duty relates to "the management or general business operations" of the employer’s customers. The new DOL Interpretation severely undercuts their ability to prevail on this argument because the DOL now takes the position that the customer aspect of the regulation pertains only to customers that are businesses, not to customers who are individuals. Thus, commercial mortgage loan officers might meet the test for exemption, but residential mortgage loan officers would not.

Two important enforcement considerations

First, the DOL Interpretation affects only federal law. Some states, such as California, already have equally or more restrictive interpretations of the administrative exemption under state law, so the change in the DOL’s position is of little consequence in some states. Second, the Interpretation reflects only the DOL’s enforcement view and may yet be tested in the courts. Nonetheless, financial industry employers (and other employers having “sales” employees) can expect the Interpretation to make it harder to argue successfully that employees with “sales” responsibility qualify for the administrative exemption.

Employer strategies

Employers with questions concerning the application of the criteria for exempt status for specific positions or employees are encouraged to contact legal counsel for assistance.

Financial institutions and other businesses that currently classify mortgage loan officers or similar employees with significant “sales” duties as exempt from overtime should reassess their situation promptly and carefully. Here are some considerations:

  1. Perform the assessment for the purpose of legal advice under the guidance of legal counsel, making it subject to the attorney-client privilege.  
  2. Consider reallocating supervisory responsibility. Loan officers who supervise two or more full-time equivalents may meet the requirements of the executive exemption.  
  3. Consider adjusting employees’ responsibilities so they can qualify for the outside sales exemption if they “customarily and regularly” perform their sales duties outside the office.  
  4. Consider distinguishing between residential loan officers and commercial loan officers, because employees whose duties involve advising businesses about their finances and credit needs might meet the administrative exemption test.  
  5. If the loan officers or similar employees have duties that put them in a gray zone, but continued exempt status is preferable, carefully limit the hours these employees work, and make sure there is a clear understanding that the compensation paid covers all hours worked so as to minimize potential overtime liability if it is later determined that they were misclassified.