Copyright © 2011 by K&L Gates LLP. All rights reserved. NH/VT MORTGAGE COMPLIANCE CONFERENCE LABOR AND WAGE LAW: The Impact on MLO Compensation March 3.

Copyright © 2011 by K&L Gates LLP. All rights reserved.

NH/VT MORTGAGE COMPLIANCE CONFERENCE

LABOR AND WAGE LAW: The Impact on MLO Compensation

March 3 & 4, 2011Lake Morey Resort: Fairlee, VT

Christine Watts JohnstonK&L Gates

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Agenda

• Fair Labor Standards Act Requirements (FLSA) – Coverage– Overtime– Regular rate of pay

• Commission Payments/Other Payments

• Department of Labor Classification of MLOs

• Current Challenges to Classification Interpretation

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FLSA Requirements Overview

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FLSA Coverage

• Affects most private and public employers;

• Sets standards for the basic minimum wage and overtime pay;

• Includes recordkeeping requirements;

• Restricts the hours and types of jobs children can work

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Penalties for FLSA Violations

Back wages / Unpaid overtime compensationLiquidated damages in amount = to back wagesInjunctive reliefWillful violations = criminal ($10,000, imprisonment for 6 months or both)Individual actionsCollective (“opt-in”) actions

2 year statute of limitations (3 years if willful)

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Overtime Requirements

• FLSA requires employers to pay covered employees who are not otherwise exempt at least the federal minimum wage and overtime pay of one and one-half (1 ½) times the regular rate of pay for working hours beyond 40 hours per workweek

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Overtime Requirements

• Workweek:

– Seven consecutive 24-hour periods;

– Fixed and regularly recurring period of 168 hours;

– No daily overtime requirement for more than 8 hours per day;

– No “premium pay” requirement for work on weekends or holidays;

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Overtime (OT) Workweek requirements

• Overtime required for hours above 40 per workweek--not pay period

• EXAMPLE: 2 week pay period (80 hours worked)– Week 1: employee works 30 hours– Week 2: employee works 50 hours

• RESULT: – Week 1: no OT due– Week 2: 10 hours OT due

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Current Minimum Wage

Federal Minimum Wage: $7.25

NH State Minimum Wage: $7.25

VT State Minimum Wage: $8.15*

MA State Minimum Wage: $8.00*

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Recordkeeping Requirements

• Employers required to maintain records of all exempt and nonexempt employees, including the number of overtime hours worked each workweek by nonexempt employees

• Records must be maintained for three (3) years– Monitor compliance (self-audit)– Provide employees training on recordkeeping

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Regular Rate of Pay

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Regular Rate of Pay• To calculate OT, an employer must determine

the employee’s “regular rate of pay”

• All compensation due to an employee in a normal non-overtime workweek

• Total compensation for the week divided by the total number of hours worked (pay / hours = regular rate)– Example: Salaried employee is paid $1,000

per week based on a 35 hour workweek. Regular

hourly rate is:$1,000/35 = $28.57

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Commission Payments

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Commission Payments

• Commissions must be included in the regular rate when calculating overtime, regardless of whether commissions are paid weekly, monthly, quarterly, or on a less frequent basis

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Commission Payments

• Additional overtime compensation based on commissions need not be paid until the regular rate (including commissions) can be determined– before commissions are calculated the employee

must be paid time and one-half of regular rate, excluding commissions for OT hours

• Once rate of pay (including commission) can be determined, additional overtime must be paid

• Overtime payment, including the apportioned commission, must be equal to at least one and one-half the base salary rate

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Commission Example

LO earns $5,000 ($500 recoverable draw plus $4,500 at month end) in commissions during the course of a week and works 50 hours

Regular Rate = ($5,000 / 50) =$100 Overtime = (50 – 40) =10 hours OT due (.5 x $100 x 10) =$500

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Commission Example

LO earns monthly commission payment of $5000 and works 50 hours

Commissions allocable to a single week is $1,153.84 ($5000×12=$60,000÷52=$1,153.84)

Divide $1,153.84 by 50 gives the increase to the regular rate of $23.

Multiply one-half regular rate (.5 x $23) x 10 overtime hours = $115.38

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Commission Example

LO receives $384 in commissions for a 4-week period and worked 44, 40, 44 and 48 hours in those weeks

Divide this by 4 gives him a weekly increase of $96

Weeks 1 and 3: due additional compensation of $4.36 ($96÷44=$2.18÷2=$1.09×4 overtime hours=$4.36)

Week 2: no extra compensation due

Week 4: $8 additional compensation due

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Bonus Payments

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Bonus Payments• All non-discretionary bonuses must be counted as part

of “regular rate” and included for purposes of overtime rate calculations

• Purely discretionary bonuses are not included for overtime pay purposes– BOTH entitlement and amount of bonus must be

undetermined;– Cannot be payable under contract, agreement, or

promise;– Employee cannot have a legal right to the bonus

(explicit or implicit);– Fact and amount of bonus must be decided at or

near the end of the period for which the bonus is paid

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Non-Discretionary Bonus Payments

• Bonus must be apportioned over workweeks during the bonus period

– Example: • Quarterly bonus – apportioned over the 12 weeks

of the quarter

– Additional overtime compensation based on bonus need not be paid until rate (including bonus) can be determined

▪ During period, time and one-half of employee’s regular rate of pay must be paid

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Bonus Payments

• Once bonus and overtime compensation can be determined, additional overtime must be paid

• If impossible to allocate bonus over period worked, some “reasonable and equitable method” must be used

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Special Payments

• Gifts, Christmas bonuses, or payments made at other special occasions are generally excluded from overtime calculations

– Gifts cannot be based on hours worked, production, or efficiency

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Other Payments

• Payments made pursuant to profit sharing or savings plans are not counted toward overtime rate

• Employer benefit plans contributions are not counted toward overtime rate (e.g. health insurance or life insurance premium contributions)

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Overtime Exemptions

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Overtime Exemptions

• Exceptions to overtime requirements are based on the employee’s “primary duties”

– “Primary duty” is the principal, main, major, and most important duty that the employee performs

▪ Employee’s job title is not determinative

▪ Job descriptions are relevant, but what really matters is what the employee actually does for work

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Overtime Exemptions

• Must look at the employee’s duties as a whole:– Relative importance of the exempt duties as

compared to non-exempt duties

– The amount of time spent performing exempt duties▪ Duties that consume more than 50% of

employee’s time are likely primary duties

– The employee’s relative freedom from direct supervision

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Overtime Exemptions

• Executive

• Professional

• Administrative*

• Outside Sales*

• Computer Professional

• Highly Compensated*

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The Administrative Exemption

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The Administrative Exemption

• The Administrative Exemption applies to employees:– who are paid on salary basis at a rate no less

than $455 per week;

– whose primary duty = 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

– whose primary duties include the exercise of discretion and independent judgment

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The Administrative Exemption• Work directly related to the management or general

business operations of employer or customer

– Employee must perform work directly related to assisting with the running or the servicing of the business

– Does not include manufacturing production or selling a product in a retail or service business

– Includes work in functional areas such as tax, finance, accounting, budgeting, purchasing, auditing, research, safety and health, human resources, and legal and regulatory compliance

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The Administrative Exemption

• Exercise of discretion and independent judgment– Employees must exercise discretion and independent

judgment with respect to “matters of significance”

• Employee’s exercise of discretion and independent judgment may be subject to review

• Financial loss not equal to matters of significance

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The Administrative Exemption• Factors considered include:

– Whether employee has authority to formulate, affect, interpret or implement management policies or operating practices;

– Whether the employee carries out major assignments as to operations of the business;

– Whether employee performs work that affects business to a substantial degree;

– Whether employee has authority to negotiate and commit employer in significant matters;

– Whether employee has authority to waive or deviate from established policies and procedures without prior approval

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Overtime Exemptions

• Highly-compensated workers– An employee with total compensation of more than

$100,000 per year or more is exempt from overtime requirements if:

▪ Primary duty includes office or non-manual work;

▪ Employee’s total annual compensation is at least $455 per week; and

▪ Employee’s primary duties include one or more of the exempt duties of an executive, administrative, or professional employee

▪ Make-up payment

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The Outside Sales Exemption

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The Outside Sales Exemption• An employee engaged in the capacity of an “outside

salesman” means any employee:

– Whose primary duty is: Making sales, or Obtaining orders or contracts for goods or services

– Who is customarily and regularly engaged away from the employer’s place or places of business in performing such primary duty

• Salary requirements do not apply

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The Outside Sales Exemption• “Outside sales” does not include sales made by mail,

Internet, or telephone unless such contact is adjunct to personal contact with the customer

• Any fixed site used by a salesperson for telephonic or electronic sales is considered the employer’s place of business even if the employer is not the tenant of the location

– Employee primarily conducting sales from a home office is not employed in an “outside sales” capacity

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Department of LaborClassifications of Mortgage

Loan Officers

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DOL’s Shifting Position Re: Loan Originator Exemptions

March 31, 2006: DOL Opinion Letter supported the applicability of the outside sales exemption to L.O.s (FLSA 2006-11)

September 8, 2006: DOL Opinion Letter supported the applicability of the Administrative Exemption to L.O.’s (FLSA 2006-31)

March 24, 2010: DOL Administrator’s Interpretation reversed position as to Administrative Exemption (2010-1)

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DOL Classifications of Mortgage Loan Officers (MLOs)

• March 2006 DOL Statement Regarding Mortgage L.O.’s as “Outside Salesmen”

– DOL opinion Letter FLSA 2006-11 position of WHD:“employees of finance companies who obtain and solicit

mortgages may be exempt outside sales employees if they are customarily and regularly engaged away from their employer’s place of business in obtaining mortgages from brokers and individuals”

– DOL found that the loan officers were appropriately considered exempt outside salespeople

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DOL Classifications of MLOs• DOL explained that the mortgage L.O.’s in question:

– Performed their work primarily outside the employer’s office;

– Spent significant time away from their employer’s place of business (or the employee’s home office) meeting with prospective customers at locations, such as a client’s home, and making in-person calls on real estate agents and brokers, financial advisors and other potential referral sources;

– Were responsible for originating their own sales by contacting prospects and developing and monitoring referral sources;

– Obtained credit information and other necessary documentation for loan application process; and

– Had considerable flexibility to set their hours and to schedule their tasks during the work day.

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DOL Classifications of MLOs

• Activities such as making phone calls, sending e-mails, and meeting with clients in the office were considered exempt only if performed incidental to or in conjunction with the L.O.’s own outside sales activities

• The DOL noted that work incidental to the L.O.’s obtaining the mortgage, such as obtaining credit information from the customer before and after the sale would qualify as exempt work if done with respect to the employee’s own sales and not just generally for the overall sales of the employer

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DOL Classifications of MLOs

“customarily and regularly” engaged away from the employer’s place of business

“customarily and regularly” = greater than occasional but less than constant

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DOL Classifications of MLOs

“sale” = an exchange, contract to sell or other disposition

LOs are engaged in sales because the “exchange” or consideration is the interest paid for an amount loaned

MUST perform exempt outside work every workweek

INDIVIDUAL case by case determination

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DOL Classifications of MLOs

• September 2006: Department of Labor Statement Regarding Mortgage Loan Officers

– DOL Opinion Letter FLSA 2006-31

– Mortgage Loan Officers properly exempt under the Administrative Exemption Assumed that less than half of the Mortgage Loan Officer’s

working time over any particular period is spent on customer specific persuasive sales activity (majority of time inside employer’s place of business, including home office)

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DOL Classifications of MLOs

• Focused on the “financial services” example in the Federal regulations which state that employees in the financial services industry generally satisfy the Administrative Exemption if their duties include:

– Work such as collecting and analyzing information regarding the customer’s income, assets, investments or debts; determining which financial products best meet the customer’s needs and financial circumstances; advising the customer regarding the advantages and disadvantages of different financial products; and marketing, servicing or promoting the employer’s financial products

• The Federal regulations state: “However, an employee whose primary duty is selling financial products does not qualify for the administrative exemption.”

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DOL Classifications of MLOs

• The L.O.’s evaluated by the DOL had primary duties other than sales, including:

– Collecting and analyzing a customer’s financial information;

– Advising customers about the risks and benefits of various mortgage loan alternatives including options and variables in light of their individual financial circumstances; and

– Advising customers about alternative loan programs.

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DOL Classifications of MLOs• The L.O.’s evaluated by the DOL also “exercised discretion

and independent judgment”– L.O.’s evaluate the products, options, and variables

available to determine which mortgage products best serve the customer’s needs

• Use of software programs or tools to assess risk and narrow scope of products does not disqualify for lack of independent judgment and discretion

– DOL noted that “the use of well established techniques and procedures described in manuals or other sources within closely prescribed limits to determine the correct response to an inquiry or set of circumstances,” will not satisfy the exercise of discretion and independent judgment requirement to come within the Administrative Exemption

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March 2010: DOL changes its Position

• L.O.’s No longer eligible for the Administrative Exemption

– DOL Administrator’s Interpretation No. 2010-1

– The DOL determined that the position of Mortgage L.O. does not fall within the Administrative Exemption because primary duty = sales / production

• DOL no longer to issue Opinion Letters; instead to issue “Administrator Interpretations” to provide guidance and compliance assistance to “broadest number of employers and employees”

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DOL Administrator’s Interpretation 2010-1

• Typical LO duties:– Receive internal leads; contact potential customers or

receive contacts from customers by mail or other marketing activity;

– Collect required financial information from customers (including income information, employment history, assets, investments, home ownership, debts, credit history, prior bankruptcies, judgments, and liens);

– Run credit reports;

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DOL Administrator’s Interpretation 2010-1

•Typical LO duties (continued):

– Enter collected financial information into a computer program that identifies which loan products may be offered to customers based on the financial information provided;

– Assess loan products and discuss terms and conditions of particular products with customers to match needs with available products;

– Compile customer documents for underwriter or loan processor; and

– Finalize documents for closing

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DOL Administrator’s Interpretation 2010-1• The DOL highlighted the “production versus administrative

dichotomy”

– Administrative exemption limited to those employees whose primary duty relates to administration as distinguished from production of business operations

– Running the business (administrative) vs. the business’ offering in the marketplace (production)

– Employers’ primary business purpose is to design, create and sell home lending products

– Loan officers’ duties were primarily to sell loans to customers; thus L.O.’s engaged in production activities

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DOL Administrator’s Interpretation 2010-1• Factors to be considered in determining whether an employee has a

primary duty of making outside sales:– The employee’s job description;

– The employer’s qualifications for hire;

– Sales training;

– Method of payment;

– Proportion of earnings directly attributable to sales;

– Work performed incidental to sales also considered sales work (e.g., analysis of financial information);

– Screening for the benefit of the employer rather than servicing for the benefit of the customer

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DOL Administrator’s Interpretation 2010-1

• Work for an employer’s customers does not qualify for the Administrative Exemption where the customers are individuals seeking advice for their personal needs, such as people seeking mortgages for their homes

– Individuals acting in a purely personal capacity do not have “management or general business operations”

– If the customer is a business seeking advice about, for example, a mortgage to purchase land for a new manufacturing plant, to buy a building for office space, or to acquire a warehouse, the advice regarding such decisions might qualify under the administrative exemption

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DOL Administrator’s Interpretation No. 2010-1

• An employee whose primary duty is selling financial products does not qualify for the administrative exemption

– The DOL withdrew its September 2006 Opinion based on its determination that the primary duty of a Mortgage L.O. is sales

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Challenges to the DOL’s Interpretation

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Amicus Brief: Henry v. Quicken Loans (E.D.Mich) Filed 12/13/10

• Filed on behalf of Mortgage Bankers Ass’n, American Bankers Ass’n, American Fin. Svcs. Ass’n, Consumer Mortgage Coalition, Housing Policy Council, Independent Community Bankers of America, and Community Mortgage Banking Project

• Challenge to level of deference to be given to DOL Administrator’s Interpretation

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Amicus Brief: Henry v. Quicken Loans (E.D.Mich) Filed 12/13/10

• Argues that Administrator's Interpretation Should NOT be followed because:

– Inconsistent with the regulations concerning employees in financial services industry;

– Contrary to DOL’s stated intention in preamble of 2004 regulations;

– Conflicts with DOL’s own prior opinion letters;– Creates unfair surprise; and– Regulations were not ambiguous.

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Mortgage Bankers Association v. Solis, et. al., D.D.C.; Filed 01/12/11

• Complaint for Declaratory and Injunctive Relief

– Seeks judicial review of the DOL Administrator’s Interpretation 2010-1

– Requests order declaring unlawful, vacating and enjoining implementation of the Administrator’s Interpretation

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Suggested Actions?

State of the law is uncertain – err on side of caution or risk becoming a test case;

Review classifications and make INDIVIDUAL determinations as to whether conversions are required;

If necessary, implement procedures to track hours and monitor overtime;

Consider alternative compensation structures.

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FLSA Best Practices

Conduct periodic exemption self-audits

Maintain accurate time records

Train supervisors about recordkeeping and payments

Require written authorization for overtime

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FLSA Best Practices

Take action when employees work overtime without authorization

Calculate and pay OT as soon as determinable

Adopt policy to take advantage of “safe harbor” for deductions

Consult an expert

Copyright © 2011 by K&L Gates LLP. All rights reserved.

NH/VT MORTGAGE COMPLIANCE CONFERENCE

LABOR AND WAGE LAW:The Impact on MLO Compensation

March 3 & 4, 2011Lake Morey Resort: Fairlee, VT

Christine Watts JohnstonK&L Gates