Employment law information and resources for employers and employees in California, with a focus on local services for Santa Barbara, San Luis Obispo and Ventura Counties
Thursday, August 23, 2012
Mortgage underwriters ruled non-exempt, qualify for overtime and FLSA rules
In a class action lawsuit out of Washington state, the District Court has ruled that residential mortgage underwriters are not exempt from the requirements of the Federal Fair Labor Standards Act (FLSA) and Washington's version of the same law, the Washington Minimum Wage Act.
Good Faith Does Not Protect Employers Who Make Mistakes
First, the employers in this case went the extra mile in trying to comply with the law. In 2006, they hired law firm Morgan, Lewis & Bockius to audit their decision to classify Plaintiffs as exempt administrative workers. Morgan Lewis ultimately advised Defendants that the decision was proper.
In 2008, Morgan Lewis reviewed Whalen v. J.P. Morgan Chase & Co., 569 F.Supp.2d 327 (W.D.N.Y.2008), which held that mortgage underwriters fell under the FLSA's administrative exemption. Morgan Lewis reviewed Whalen and concluded that it supported the employer's decision to classify Plaintiffs as exempt. The law firm also reviewed a 2006 opinion letter on loan officers, published guidance on financial services industry employees and other legal authority.
In this case, despite the law firm's advice that the mortgage underwriters were covered by the administrative exemption, the employers were clearly concerned about the decision to classify their underwriters as exempt employees. Internal emails from May 2009 showed that the issue had been “a source of debate for some time.” The employers were particularly concerned because they knew that most of their competitors were paying their underwriters overtime.
The employers next hired another attorney, Maxine Goodman, to perform a new audit of the exemption decision. Like Morgan Lewis, Goodman concluded that the 2006 opinion letter on loan officers, published guidance on financial services industry employees, and Whalen supported Defendants' exemption decision.
Attorney Maxine Goodman reviewed the Davis decision and concluded that underwriter duties described in that case were analogous to Plaintiffs' duties. In January 2010, she recommended that the employers reclassify their mortgage underwriters as nonexempt. They did so about a month later.
Think the employers were acting in good faith when they hired all those lawyers? The court wasn't ready to say so. Under the law, there is a very limited good faith defense available under § 260 of the Portal–to–Portal Act. Under § 260, “if the employer shows to the satisfaction of the court that the act or omission giving rise to [an overtime pay action] was in good faith and that he had reasonable grounds for believing that his act or omission was not a violation of the [FLSA], the court may, in its sound discretion, award no liquidated damages or award any amount thereof not to exceed the amount specified in [§ 216(b) ].” 29 U.S.C. § 260.
What is the administrative exemption?
Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional and outside sales employees. Section 13(a)(1) and Section 13(a)(17) also exempt certain computer employees. To qualify for exemption, employees must meet certain tests regarding their job duties and be paid on a salary basis at not less than $455 per week.
Job titles do not determine exempt status. In order for an exemption to apply, an employee’s specific job duties and salary must meet all the requirements of the Department of Labor’s regulations.
As of August 23, 2012 (remember, the law changes every day), to qualify for the administrative employee exemption, all of the following tests must be met:
• The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week;
• The employee’s primary duty 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; and
• The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
Here, the mortgage underwriters were working in excess of 40 hours a week, and were expected to review a certain number of applications each day. Incentive bonuses were based on the total value of reviewed loans, and evaluations included the number of errors made in applying the mortgage company's guidelines.
In short, the underwriter's duties were "functional as opposed to conceptual," as one employer witness said. After mortgage applications went through an automated review system, the employees reviewed the application for compliance with guidelines the automated review system could not process and made the final decision about whether to approve the application. They were able to recommend approval of loans that did not meet guidelines, but in those cases, the final approval went to another department. The underwriters had limited freedom to calculate income and assets, but the calculations had to be in line with the employers' own criteria.
The law changes every day, and this legal analysis is for information purposes only. Nothing herein is intended to create an attorney client relationship, nor is this intended as an advertisement for legal services. You should always consult a licensed attorney for legal advice.