Typical Loan Officer Must be Paid Overtime By: Gregory P. Kult* October 11, 2010 Earlier this year, the U.S. Department of Labor ( DOL ) reversed its position on the exempt status of mortgage loan officers ( LOs ) 1 and concluded that individuals who perform the typical duties of a LO are not exempt from the minimum wage and overtime requirements of the Fair Labor Standards Act ( FLSA ) as administrative employees. 2 Unless another exemption applies, LOs must be paid no less than the federal minimum wage 3 and remain eligible for overtime. Recognizing that many LOs do not want to be paid an hourly wage, this article provides guidance for employers and LOs seeking alternatives. Application of the Administrative Exemption For the administrative exemption to apply, the employer must prove that the LO satisfies both a salary test and a duties test. 4 Specifically: The LO must be compensated on a salary or fee basis 5 at a rate of not less than $455.00 per week; The LO s primary duty 6 must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer s customers 7 ; and The LO s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance. 8 DOL Assumptions About LO Duties In determining whether LOs satisfy the test set forth in the second bullet point above, the DOL assumed that the following are typical LO duties: Receive internal leads and contact potential customers or receive contacts from customers generated by direct mail or other marketing activity; Collect required financial information from customers, including information about income, employment history, assets, investments, home ownership, debts, credit history, prior bankruptcies, judgments, and liens; Run credit reports; Enter financial information into a computer program that identifies which loan products may be offered based on the financial information provided; Assess the loan products and discuss with the customers the terms/conditions of particular loans, trying to match the customer s needs with a company product; Compile customer documents for forwarding to an underwriter or loan officer; Finalize documents for closings.
The DOL concluded that a typical LO s primary duty is selling the unique products/services that the LO s employer offers in the marketplace rather than performing general administrative work applicable to the running of any business. Consequently, the typical LO does not have a primary duty of performance of office or non-manual work directly related to the management or general business operations of the employer or the employer s customers and, therefore, does not qualify for the administrative exemption. Risks of Misclassification If a LO is improperly classified as exempt, the LO may be entitled to up to three years of unpaid minimum wage and overtime (an amount which may be doubled, although a good faith exception 9 may apply to, at a minimum, pre-march 23, 2010 compensation), plus costs and attorneys fees. Class actions are common, and FLSA claims typically are not covered by insurance policies. Owners, officers, and/or managers may be individually liable for their institution s violations of the FLSA. Many employers are evaluating their operations to see if another FLSA exemption applies to their LOs. Attention often turns to the outside sales exemption. After all, the DOL essentially has conceded that that the primary duty of the typical LO is making sales. Employers should keep in mind that the outside sales exemption requires that the LO be customarily and regularly engaged away from the employer s place or places of business in performing the primary duty of sales. 10 This requirement may not be as easy to satisfy as one may assume. According to the DOL: The outside sales employee is an employee who makes sales at the customer s place of business or, if selling door-to-door, at the customer s home. Outside sales does not include sales made by mail, telephone or the Internet unless such contact is used merely as an adjunct to personal calls. Thus, any fixed site, whether home or office, used by a salesperson as a headquarters or for telephonic solicitation of sales is considered one of the employer s places of business, even though the employer is not in any formal sense the owner or tenant of the property. 11 Considering the volume of litigation over compensation in the financial services industry these days, efforts by LOs and/or their employers to apply the outside sales exemption likely will be closely scrutinized by the DOL. What follows is an alternative approach for employers who concede that their LOs are non-exempt, or who do not want to fight the battle. Preserving the Commission Concept Employers and LOs who like the concept of commission-based compensation but want to reduce the risk of challenges over FLSA-exempt status may be able to achieve both goals. A potential solution involves paying LOs a base hourly wage plus a commission. The LO must track and report all hours worked, and the employer must maintain records of those hours. 12
The LO must be paid at least the federal minimum wage (currently $7.25/hour) for all hours worked and at least one and one-half (1½) times the LO s regular rate 13 for all hours worked over forty (40) during the designated workweek. A commission would be paid if and to the extent the agreed-upon percentage of loans that close exceeds guaranteed minimum wage and overtime payments. Commission payments must be included in the regular rate for purposes of calculating overtime. 14 This means that a supplemental overtime calculation will be required. An illustration is attached as Attachment A. Note: There is a case pending in a Missouri federal district court 15 that challenges the practice of deducting overtime from future commission payments. The plaintiffs Complaint states, in part: Under the Defendant s compensation plan for its Loan Officers, said Loan Officers earn the same amount of gross compensation regardless of the hours they work, therefore, Defendant fails to pay any premium to Loan Officers for hours worked in excess of forty in a given workweek in violation of the FLSA. Under the Defendant s compensation plan for its Loan Officers, any compensation paid to Loan Officers that is labeled as overtime pay is simply later deducted from the Loan Officer s commission income, which in essence, eliminates any alleged overtime paid. First Amended Complaint Pars. 17-18. Whether these allegations will gain traction likely depends on how the commission plan was worded. Many states provide employers with a great deal of flexibility in establishing commission formulas. Under the FLSA, the issue generally is not how the commission is calculated (that generally is a matter of agreement between the employer and employee), but whether the commission is included in the regular rate for purposes of calculating overtime. The potential solution illustrated in Attachment A is not an attempt to avoid paying mandatory overtime. It contemplates a carefully worded compensation formula, agreed-upon before the work is performed, that clarifies the commission will be included in the regular rate calculation and that guarantees the LO will be paid no less than minimum wage and no less than 1½ times the regular rate for all hours worked over 40 during the workweek. The illustration in Attachment A is not the only potential response to this challenge. It may even be possible to create a commission formula that takes into account all mandatory payments in a manner that would not require a carry-forward of supplemental overtime pay. Because the language of an employer s compensation plan is critical to determining whether the plan complies with federal and state law, employers should consider seeking legal review of their plan prior to implementation. We would welcome any opportunity to discuss your goals regarding compensation and to work with you as you try to achieve those goals in an administratively feasible manner that complies with the FLSA.
Paying LOs a Salary Paying LOs a salary will not eliminate the risk of violating the FLSA s overtime requirements. As discussed above, for the administrative exemption to apply, an employer must prove the LO meets both a salary test and a duties test. If a salary-based LO performs the typical duties of an LO as outlined in this article, the DOL likely would find that LO nonexempt (i.e., entitled to overtime). The FLSA regulations provide guidance for paying overtime to non-exempt employees who are paid a salary. 16 With respect to full time employees whose hours fluctuate, employers often are better off paying according to the fixed salary for fluctuating hours method outlined in 29 C.F.R. 778.114, illustrated as follows: LO is paid a salary of $1200.00/week Over the course of three weeks, LO works 45, 35, and 75 hours respectively Overtime for each week is calculated as follows: Week 1: $1200.00/45 hours = $26.67 x.5 x 5 hrs. = $66.68 in additional overtime Week 2: No overtime (LO did not work over 40 hours) Week 3: $1200.00/75 hours = $16.00 x.5 x 35 hrs. = $280.00 in additional overtime A Word About Dodd-Frank The Dodd-Frank Wall Street Reform and Consumer Protection Act and the Board of Governors of the Federal Reserve System Final Rule for Regulation Z (12 C.F.R. Part 226) (August 16, 2010) ( Final Rule ) on loan originator compensation that takes effect with respect to loan applications taken on or after April 1, 2011 may change the method by which institutions pay LOs. As new compensation programs are considered, employers should determine which components of compensation must be included in the regular rate for purposes of calculating overtime compensation to non-exempt LOs. Finally, financial institutions should keep in mind that just because the Final Rule appears to permit a practice for purposes of the Truth in Lending Act (for example, paying different LOs different percentages of loan values), various employment laws, including laws regarding discrimination, may impact the legality of the employer s pay practices. Legal review by employment law counsel should be considered. If we can help, please call. *Current contact information: Greg Kult (Licensed in Indiana and Wisconsin) (317) 860-5341 gkult@woodmclaw.com This article does not constitute legal advice, nor is it a substitute for familiarity with the most current statutes, regulations, ordinances and case law on this topic. Slight differences in factual context can result in significant differences in legal obligations. Consider seeking legal advice with respect to any particular situation.
1 The DOL acknowledges such individuals sometimes are referred to as mortgage loan representatives, mortgage loan consultants, or mortgage loan originators, and that a job title is not determinative of exempt status. 2 Administrator s Interpretation No. 2010-1 (March 24, 2010) 3 Assuming that there is no State/local law minimum in excess of the federal minimum 4 29 C.F.R. 541.200 5 The salary or fee basis requirement is explained at 29 C.F.R. 541.600-.606 6 An employee s primary duty is the principal, main, major, or most important duty that the employee performs. 29 C.F.R. 541.700(a) 7 See 29 C.F.R. 541.201 8 See 29 C.F.R. 541.202 9 29 U.S.C. 260 10 29 C.F.R. 541.500 11 29 C.F.R. 541.502 12 The recordkeeping regulations are located at 29 C.F.R. Part 516. The regulations for determining what constitutes hours worked are located at 29 C.F.R. Part 785. 13 Regular Rate = Total compensation actually paid to LO for the week (less statutory exclusions)/total hours worked during the week. 29 C.F.R. 778.109 14 29 C.F.R. 778.117-.121 15 McCauley v. First Option Mortgage, LLC, Case No. 10-cv-0980 (E.D. Mo. 2010) 16 29 C.F.R. 778.113-.114
Attachment A Illustration: Goal is Compensation of One Percent (1.0%) of the Value of Loans Closed Assumptions: Loan officer ( LO ) begins work October 3, 2010. LO is compensated at a base hourly wage equivalent to the federal minimum wage (currently $7.25 per hour). In addition, LO is eligible for a commission. LO is eligible for overtime pay for all hours worked over 40 during the workweek. The commission formula, agreed to before the work is performed, is one percent (1%) of the value of loans that close less any amounts to which the loan officer was entitled as non-commission wages (for example, base wages and overtime wages). The employer designates the workweek as running from midnight Sunday to 11:59 p.m. the following Saturday. 1 There are 26 pay periods during the year, each of which covers two FLSA workweeks. The pay period runs from midnight Sunday to 11:59 p.m. Saturday two weeks later. The LO is paid every other Friday for the pay period that ends the preceding Saturday. 2 October 3-9, 2010: LO works 50 hours and does not close any loans. October 10-16, 2010: LO works 45 hours and does not close any loans. October 17-23, 2010: LO works 45 hours and closes $300,000 in loans. October 24-30, 2010: LO works 38 hours and closes $450,000 in loans. October 31-November 6, 2010: LO works 60 hours and closes $350,000 in loans. November 7-13, 2010: LO works 55 hours and closes $250,000 in loans. The LO would be paid as follows: October 22, 2010 payday: $743.13 (gross), calculated as follows: October 3-9 workweek: Non-commission wages: ($7.25/hr x 50 hrs.) + ($7.25 x.5 x 10 hrs.) = $362.50 + $36.25 = $398.75 October 10-16 workweek: Non-commission wages: ($7.25/hr x 45 hrs.) + ($7.25 x.5 x 5 hrs.) = $326.25 + $18.13 = $344.38 October 3-16 pay period: Commission = $0; Additional overtime due employee = $0
November 5, 2010 payday: $6893.25 (gross), calculated as follows: October 17-23 workweek: Non-commission wages: ($7.25/hr x 45 hrs.) + ($7.25 x.5 x 5 hrs.) = $326.25 + $18.13 = $344.38 October 24-30 workweek: Non-commission wages: $7.25/hr x 38 hrs. = $275.50 October 17-30 pay period: Commission = $7500.00 3 - $743.13 4 - $344.38 5 - $275.50 6 = $6136.99 Additional overtime due employee based on commission: $136.38, calculated as follows: Additional overtime for October 17-23: ($6136.99 x.4) 7 /45 hrs. = $54.55/hr x.5 x 5 hours = $136.38 Additional overtime for October 24-30: $0 (LO did not work over 40 hours) Total paid to LO: $344.38 + $275.50 + $6136.99 + $136.38 = $6893.25 November 19, 2010 payday: $6618.80 (gross), calculated as follows: October 31-November 6 workweek: Non-commission wages: ($7.25/hr x 60 hrs.) + ($7.25 x.5 x 20 hrs.) = $435.00 + $72.50 = $507.50 November 7-13 workweek: Non-commission wages: ($7.25/hr x 55 hrs.) + ($7.25 x.5 x 15 hrs.) = $398.75 + $54.38 = $453.13 October 31- November 13 pay period: Commission = $6000.00 8 - $507.50 9 - $453.13 10 - $136.38 11 = $4902.99 Additional overtime due employee based on commission: Additional overtime for October 31- November 6: ($4902.99 x.583 12 )/60 hrs. = $47.64/hr x.5 x 20 hours = $476.40 Additional overtime for November 7-13: ($4902.99 x.417 13 )/55 hrs. = $37.17/hr x.5 x 15 hours = $278.78 Total additional overtime to be paid to LO = $476.40 + $278.78 = $755.18 14 Total paid to LO: $507.50 + $453.13 + $4902.99 + $755.18 = $6618.80
The LO closed $1,350,000.00 in loans from October 3, 2010 November 13, 2010. The LO and employer want to pay compensation equal to one percent (1%) of the amount of loans that close, or $13,500.00. The LO has been paid as follows: October 22: $743.13 November 5: $6893.25 November 19: $6618.80 $14,255.18 If future commissions are earned in a sufficient amount, $755.18 will be factored into the commission calculation(s) 15, effectively making the total paid for this time period $13,500.00. Note: Employers should establish a written compensation plan before the work is performed. Legal review by an attorney familiar with state and federal wage and hour law should be considered. Employers face an uphill battle trying to justify compensation programs after-the-fact in litigation. A plan that is not drafted in a manner that takes into account the FLSA issues outlined in this article may end up violating the FLSA even though the employee receives the same net pay as s/he would pursuant to a plan that is FLSA-compliant. 1 The employer may designate the FLSA workweek as any period of 168 consecutive hours (7 consecutive 24-hour periods). 29 C.F.R. 778.105 2 State law should be consulted. For example, Indiana employers may be able to justify one additional week between the end of a pay period and the actual pay day for that pay period if that would help with calculations. Ind. Code 22-2-5-1 requires employees to be paid within ten (10) business days of the end of a pay period. 3 $750,000.00 in loans closed x.01 4 Non-commission wages paid in previous pay period(s) that have not already been factored into commission calculation 5 Non-commission wages for first workweek of this pay period 6 Non-commission wages for second workweek of this pay period 7 Portion of commission attributed to this workweek ($300,000/$750,000 =.4) 8 $600,000.00 in loans closed x.01 9 Non-commission wages for first workweek of this pay period 10 Non-commission wages for second workweek of this pay period 11 Non-commission wages paid in previous pay period(s) that have not already been factored into commission calculation 12 Portion of commission attributed to this workweek ($350,000/$600,000 =.583) 13 Portion of commission attributed to this workweek ($250,000/$600,000 =.417) 14 See note 15 below 15 If no additional commission is earned (for example, if the LO resigns), the employer cannot recover this $755.18. The statutory minimum wage and overtime is guaranteed, regardless of production.