Ever since the U.S. Department of Labor's new overtime regulations went into effect in August 2004, businesses across industry lines have been re-examining their overtime practices to ensure they comply with the Fair Labor Standards Act (FLSA). Many mortgage lenders are reviewing their own practices to avoid a Department of Labor investigation or overtime pay lawsuit — and the associated back wages and penalties.

When subjected to the harsh light of day, however, many mortgage lenders have a problem. While administrative staff are widely understood to be hourly employees entitled to time-and-a-half for overtime, lenders might be surprised to learn that their highly compensated mortgage brokers and loan officers who commonly put in long, unpredictable, and unaccounted for hours and are paid exclusively on a commission basis, may also be entitled to overtime.

Although commission-only compensation is widespread for such employees, as a result of that compensation structure, companies may face significant liability for failing to pay overtime when such employees work more than 40 hours per week.

A common misconception

Many employers mistakenly believe that because they pay commissions to brokers and loan officers, many of whom are handsomely compensated, they must be exempt from overtime rules. Whether or not that is true depends not just on job titles or total compensation, but also on the details of the employees' actual day-to-day duties.

Exemptions from overtime apply to certain administrative, executive, professional and outside sales employees, but not to salaried or commissioned workers generally. With respect to brokers and loan officers, the mostly likely exemptions are the outside sales or administrative exemptions.

Clarifying exemption rules

Employees who qualify for the “outside sales” exemption need not track their hours or receive overtime compensation, and may be paid on a straight commission basis. The exemption is limited, however, and applies only to sales employees who customarily and regularly make sales at a customer's place of business or home.

The outside sales exemption will not apply if sales are performed by telephone or at any “fixed site,” whether the employer's site or a home office. If employees do not spend at least half their time making sales calls at a customer's place of business, then they probably do not qualify for the exemption.

Another possibility is the so-called “administrative” exemption. In that case, exempt administrators perform office or non-manual work directly related to the management or business operations of the employer or the employer's customers. They also exercise discretion and independent judgment on important matters.

Prior to August 2004, most loan officers did not qualify for the administrative exemption because they were considered not to exercise sufficient independent judgment and discretion. However, new regulations clarify that financial services employees can be exempt if their duties focus on collecting and analyzing information; determining which financial products best meet the customer's needs; and advising the customer regarding the advantages and disadvantages of various products.

Minimizing your risk

To increase the likelihood that loan officers will fall within this new financial services example, mortgage lenders should emphasize the loan officer's role as an analyst and advisor regarding the customer's financial situation and the products that best meet their needs.

Areas involving discretion and judgment should be highlighted and enhanced. Time spent on routine clerical duties such as processing loan applications should be minimized or assumed by non-exempt administrative staff. Employers wishing to satisfy the administrative exemption must pay employees a guaranteed weekly salary of at least $455.

While the guaranteed salary may be a nonrecoverable draw against commissions (that is, no commissions paid out until the loan officer has covered the amounts already received in draw), he or she must receive the draw for any week in which work is performed.

Mortgage lenders would be wise to minimize their risk of an overtime pay lawsuit or investigation. Penalties under the FLSA can be severe and back wages can add up quickly, particularly for highly compensated employees such as loan officers and brokers. When it comes to overtime practices, an ounce of prevention is worth a pound of cure.

Carey Bartell is a partner for the litigation and employment law practice of the Chicago-based law firm of Sachnoff & Weaver Ltd. She can be reached at cbartell@sachnoff.com.

U.S. DEPARTMENT OF LABOR ENFORCEMENT STATISTICS

(Fiscal Year 2003)
Fair Labor Standards Act cases 32,491
Cases involving monetary violations 22,641
Back wages collected $182.1 million
Employees receiving back wages 314,660
Source: U.S. Department of Labor