In the recent case of Perez v. Mortgage Bankers Association, the United States Supreme Court unanimously rejected a challenge to the validity of a controversial 2010 administrative interpretation by the U.S. Department of Labor ( “DOL”).

At issue was DOL’s interpretation that the administrative exemption of the Fair Labor Standards Act (“FLSA”) typically does not apply to certain mortgage-related positions in the financial services industry such as mortgage loan originators, mortgage loan representatives, mortgage loan consultants, and mortgage loan officers (collectively referred to herein as “MLOs”).

You may recall that in 2010, DOL concluded MLOs ordinarly will not satisfy the Administrative Exemption because the primary duty of most MLOs is to engage in sales, as opposed to administrative, activities. DOL observed that the Administrative exemption is limited to those employees whose primary duty relates to “administrative operations” as distinguished from “production operations” of a business. In other words, “it relates to employees whose work involves servicing the business itself – employees who ‘can be described as staff rather than line employees.’” Citing numerous cases, DOL explained that this “production versus administrative dichotomy” is intended to distinguish “between work related to the goods and services that constitute the company’s marketplace offerings and work that contributes to running the business itself. Indeed, the courts have drawn a clear distinction between those employees directly producing the good or service that is the intended output of a business versus those employees who attend to the general administrative affairs associated with the running of any business. Where work squarely falls on the production side of this line, such as sales functions, the Administrative Exemption will not apply.

The 2010 interpretation explicitly withdrew a 2006 opinion letter that had found the duties and responsibilities of MLOs qualified them as exempt administrative employees. In doing so, DOL did not engage in the formal notice-and-comment rulemaking process.  The Mortgage Bankers Association challenged the 2010 interpretation, but lost at the District Court level. The D.C. Circuit reversed, finding that a notice-and-comment period was required under the Administrative Procedure Act because the 2010 guidance was a “definitive” regulatory interpretation that significantly reversed DOL’s previous interpretation. The Supreme Court disagreed, however, and held that federal agencies like DOL are not required to proceed through the formal notice-and-comment rulemaking process to change their interpretations of existing rules.

As a result of the Perez decision upholding DOL’s March 24, 2010 Administrative Interpretation, most financial institutions would be well-advised to reexamine the exempt status of MLOs and related positions. It is likely that employers may need to reclassify as non-exempt certain employees occupying these positions. It also may be necessary to restructure compensation arrangements to account for new overtime obligations. DOL’s regulations provide guidance with regard to overtime premium calculations. Failure to adjust classifications and compensation practices could lead to FLSA exposure for back pay, liquidated damages, and attorneys’ fees for up to two or three years. Employers would be well advised to seek the assistance of outside counsel to guide them through the intricacies of these difficult changes.

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