In our April 2006 newsletter, we discussed the outbreak of class-action lawsuits against fi nancial and mortgage brokerage fi rms, and the hefty settlements being negotiated by the plaintiffs in these actions and their attorneys. A year later, the battle continues. The main issue continues to be whether fi nancial advisors, stock brokers and mortgage loan offi cers fall under the Fair Labor Standards Act’s administrative exemption or, instead, are non-exempt “inside” sales employees entitled to overtime.

An employee qualifi es for the administrative exemption if:

(1) the employee is paid on a salary basis at a rate not less than $455 per week;

(2) his/her primary duty is the performance of offi ce or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and

(3) the primary duty includes the exercise of discretion and independent judgment with respect to matters of signifi cance. DOL regulations state that employees in the fi nancial services industry will generally satisfy the duties test if they perform:

work such as collecting and analyzing information regarding the customer’s income, assets, investments or debts; determining which fi nancial products best meet the customer’s needs and fi nancial circumstances; advising the customer regarding the advantages and disadvantages of different fi nancial products; and marketing, servicing or promoting the employer’s fi nancial products. 29 C.F.R. §541.203(b).

Recent DOL Opinion Letters

In September and November 2006, the Department of Labor issued opinion letters that appeared to provide support for the employers involved in these class-action lawsuits. In its September letter, the DOL concluded that, under the facts presented to it, “mortgage loan offi cers” (a title that includes mortgage loan representatives, consultants, originators and bankers) were exempt; they work with their “employer’s customers to assist them in identifying and securing a mortgage loan that is appropriate for their individual fi nancial circumstances and designed to help them achieve their fi nancial goals, including home ownership.”

An employee whose primary duty is selling financial products does not qualify for the administrative exemption. Although the mortgage loan offi cers engaged in some sales-related activities, they were of a promotional and marketing nature and did not comprise more than fi fty percent of the offi cers’ working time. The mortgage loan offi cers exercised requisite discretion and independent judgment because they evaluated various loan products, options and variables, and decided which product fi t the customers’ needs. Their reliance on computer programs was not problematic because the programs merely “enhance[d] the mortgage loan offi cers’ ability to evaluate products, options and variables to determine which mortgage products might serve the customer’s needs.”

In its November 2006 letter, the DOL applied similar reasoning in fi nding that “registered representatives” (comprising jobs titles such as account executives, broker-representatives, fi nancial executives, fi nancial consultants, fi nancial advisors, investment professionals and stock brokers) also were exempt. The DOL explained that the registered representatives “have a primary duty other than sales, because their work includes collecting and analyzing a client’s fi nancial information, and advising the client about the risks and the advantages and disadvantages of various investment opportunities in light of the client’s particular fi nancial status, objectives, risks, tolerance, tax exposure, and other investment needs.” They exercise requisite discretion and independent judgment because they evaluate their customers’ individual fi nancial circumstances and investment needs and assess and compare the alternatives before making recommendations for investment options to the client.

An issue addressed only in the registered representatives’ opinion letter was whether the employees’ compensation plan, comprised of a salary/ draw plus a commission or fee, satisfi ed the “salary basis” test. Employees satisfy this test when they regularly receive a predetermined amount that exceeds $455 per week and is not subject to reduction because of variation in the quality or quantity of the work performed. The DOL concluded that the registered representatives’ pay plan would satisfy the test as long as the salary component was never reduced below $455 per week. The opinion suggests that the pay plan would not satisfy the salary basis test if, for example, amounts deducted for cancelled trades, trade errors or expenses brought the salary/draw below the $455 per week minimum. Such deductions could be made from the employees’ commissions without the employee losing exempt status.

What Should Employers Take From The Opinion Letters?

The DOL opinion letters bolster the argument that fi nancial and mortgage industry leaders have been making for the past several years; mortgage loan offi cers and registered representatives qualify for the administrative exemption. However, two federal courts have so far refused to apply the DOL’s September 2006 mortgage loan offi cer opinion letter. In Pontius v. Delta Financial Corporation d/b/a Fidelity Mortgage Inc., No. 04-1737 (W.D. Pa. Mar. 20, 2007), a magistrate judge denied the employer’s summary judgment motion because the class-action plaintiffs performed work different from the work performed by the mortgage lenders discussed in the opinion letter. Likewise, in Oetringer v. First Residential Mortgage Network, Inc. d/b/a Surepoint Lending, No. 3:06CV-381-H (W.D. Ky. March 6, 2007), the court distinguished the facts before it from the facts relied upon by the DOL in denying the employer’s motion to dismiss a wage-hour class action. Although the court found that the opinion letter was “thoughtful, obviously wellresearched, and addresses thoroughly the issue at hand,” the defendants had not presented facts suffi cient for the court to fi nd that the employees in dispute fell within the group of mortgage brokers covered by the opinion letter. The judge gave the defendants 30 days to make that showing.

Courts likely will give deference to the DOL’s opinion letters if the employer can show that the duties performed by their mortgage loan offi cers, registered representatives and other employees in related jobs are akin to the duties described in the letters. Concerned employers in the fi nancial services industry should therefore carefully examine whether their employees are primarily engaged in exempt work, and whether their compensation plans are structured to satisfy the “salary basis” test.

Vedder Price is highly experienced in auditing employer FLSA practices, preparing employer policies, and defending against FLSA individual lawsuits and collective actions, having successfully challenged FLSA suits at all stages of litigation. If you have any questions about the FLSA, or have received notice that an employee is suing under the FLSA, please call Joe Mulherin (312-609-7725), Tom Wilde (312-609-7821), Mike Cleveland (312-609-7860), or any other Vedder Price attorney with whom you have worked.