loan officers: are you classifying them properly, or walking into a … perez v. mortgage bankers...

Robert Cooper Ruth L. SeroussiBuchalter Nemer PC Buchalter Nemer PC1000 Wilshire Blvd., Suite 1500 1000 Wilshire Blvd., Suite 1500Los Angeles, California 90017 Los Angeles, California 90017Direct: (213) 891‐5230 Direct: (213) 891‐5149Email: [email protected] Email: [email protected]

Loan Officers: Are you classifying them properly, or walking into a wage and hour lawsuit?

What you need to know about the Supreme Court’s March 2015 Decision in Perez v. Mortgage Bankers Association

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Agenda

• Perez v. Mortgage Bankers Association, Case No. 13‐1041

‐DOL Administrative Interpretations 2006 and 2010

‐DC Circuit Court Ruling and US Supreme Court Decision

• Classifying Loan Officers As Exempt – Do They Fall Under Some Other Exemption or are their duties atypical?

• Classifying Loan Officers As Non‐Exempt‐ Review Pay Practices

• Paying Loan Officers Commissions – Review Pay Practices

• Takeaways

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Perez v. Mortgage Bankers Association

Why is the Perez decision so significant?

• Liability for misclassifying employees has led to some of the biggest verdicts and settlements against financial institutions over the last decade, especially based upon class action liability, which has seen scores of cases in the 7, 8 and 9 figure range!

• Perez is particularly important for companies who employ loan officers for this reason. It also has broader implications concerning the ongoing reliability of agency opinion letters for guidance in making business decisions.

• Among other things, Perez holds that federal agencies are permitted to modify their opinions interpreting statutes and regulations under their jurisdiction, even to the point of completely reversing their prior interpretations without an opportunity for notice and comment.

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Perez v. Mortgage Bankers Association, Case No. 13‐1041

• Perez centers on the U.S. Department of Labor’s efforts to determine whether mortgage loan officers are covered by the FLSA’s overtime pay requirements or whether they are “exempt” from overtime.

• The DOL’s 2010 pronouncement that loan officers are non‐exempt reversed its 2006 opinion letter reaching the opposite conclusion. The DOL’s 2006 opinion had found that loan officers with typicalduties qualified for the administrative exemption.

• The Mortgage Bankers Assoc. challenged the DOL’s 2010 Interpretation, and in July 2013, the D.C. Circuit Court of Appeals invalidated the DOL’s 2010 pronouncement on procedural grounds.

• But, in March 2015, the U.S. Supreme Court in Perez reversed the D.C. Circuit Court’s decision, finding that the DOL was within its rights to change its mind that loan officers are now generally non‐exempt employees and, thus must be paid OT, among other things.

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The underlying question in Perez turned on whether loan officers are or are not eligible for overtime under the administrative exemption:

The DOL’s “flip‐flopping” opinions at issue in Perez concerned whether or not loan officers are exempt under the administrative exemption, which applies to employees who are:

(1) Compensated on a salary or fee basis at a rate of not less than $455 per week…(2) Whose primary duty is 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 (3) Whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

The DOL’s 2010 Interpretation pointed largely to the second factor as problematic, because federal regulations are clear that merely selling financial products is not enough—must be “directly related to management or general business operations.”

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What does Perez v. Mortgage Bankers Association mean for companies that employ loan officers?

• If you still classify your loan officers as exempt, you should revisit this classification with legal counsel– Do your loan officers fall under some other applicable federal or state

exemption – Are their duties atypical compared to other loan officers? – Employers must examine state as well as federal exemption laws. For

instance, loan officers who work in California are subject to California’s more stringent exemption requirements.


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Do your Loan Officers Fall Under Some Other Exemption?

Perez does not rule out the possibility of establishing an exemption in different circumstances or on other grounds • Classifying employees as exempt has some major advantages—especially certainty of

what employees will be paid, e.g., do not have to pay OT or comply with certain other wage and hour requirements.

• Determining whether a particular overtime exemption applies is a highly fact‐specific inquiry. Moreover, for loan officers that work in states such as California, state law exemption tests must be satisfied as well.

• Other Possible Overtime Exemptions

• Commissioned Sales

• Outside Sales

• Highly Compensated Employee (federal only)

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Federal Commissioned Sales Exemption • Potentially applies to employees of a “Retail or Service Establishment”

» Recognized as a “retail” sales or service in the particular industry, 75% annual dollar volume of sales of goods/services not for resale

• Regular rate of pay exceeds 1½ times federal minimum wage (more than $10.88 per hour)

• More than half of earnings in a representative period (one month to 12 months) consists of commissions

• Applicability of exemption may be limited:

The United States Supreme Court’s ruling in 1959 in Mitchell v. Kentucky Finance Co. Inc., subsequent decisions and DOL interpretation hold that certain financial institutions such as banks and credit companies are not retail or service establishments. At least one court has held that the 7(i) “commissioned employee” exemption may be applicable to mortgage brokers because they work in a “retail” industry. See Gatto v. Mortgage Specialists of Ill., Inc., 442 F. Supp. 2d 529 (N.D. Ill. 2006).


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California Commissioned Sales ExemptionElements

• Employee of employer governed by Wage Order 4 or 7» 4: professional, technical, clerical, mechanical or similar occupations

» 7: mercantile industry

• Earnings exceed 1½ times federal minimum wage (currently more than $13.50 per hour)

• More than half of earnings represent commissions

Limited Exemption, Overtime Only• Does not exempt other provisions of wage order: i.e., meal periods,

rest periods, records of shift and meal period start and end times


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Peabody v. Time Warner Cable, Inc. 2014 Cal Lexis 4755 (July 14, 2014, No. S204804)

The California Supreme Court’s decision in Peabody limits the application of California’s narrow commissioned sales exemption:

An employer may not attribute commission wages paid in one pay period to other pay periods in order to satisfy the minimum earnings requirement of California’s “commissioned sales employee” exemption. Must determine this on a workweek by workweek basis, based on the amount of wages actually paid in each pay period.May not average the wages paid across different pay periods to satisfy a particular workweek’s wage obligations, or attribute commissions paid in one pay period to any other pay period.

The California Supreme Court did not address whether the other requirement –that at least 50% of the pay be commissions – must also be determined on a workweek by workweek basis. The California’s Department of Labor Standards and Enforcement’s position, however, is that it must.


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Outside Sales ExemptionElements

• Makes sales, or obtains orders or contracts for services or for use of facilities for which a consideration is paid

• Customarily and regularly works away from employer’s place of business (i.e., door‐to‐door salesperson)

» Federal: employee’s primary duty

» California: over half of employee’s work time

Fixed site used as headquarters or for solicitation of sales is considered employer’s place of business, including home office

Exemption is not based on how employee is compensated


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Highly Compensated Exemption – Federal OnlyElements

• Total annual compensation of $100,000 or more

• At least $455 per week ($23,660 annual) is paid on a salary basis

• Customarily and regularly performs at least one of the exempt duties of the executive, administrative or professional exemptions

California does not recognize the highly compensated exemption for state law purposes


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Are Your Loan Officer’s Duties Atypical?

If your loan officers are exempt, are their duties atypical, such that they might fall under the administrative exemption, notwithstanding the Perez decision and the DOL’s 2010 interpretation that typicalmortgage loan officer’s duties do not?

The DOL’s 2010 Interpretation states that the following are “Typical job duties of Mortgage Loan Officers[:]

‐‐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 they contact or who contact them, including information about income, employment history, assets, investments, home ownership, debts, credit history, prior bankruptcies, judgments, and liens.‐‐Run credit reports.‐‐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 the loan products identified and discuss with the customers the terms and conditions of particular loans, trying to match the customers’ needs with one of the company’s loan products. ‐‐Compile customer documents for forwarding to an underwriter or loan processor[.]‐‐[M]ay finalize documents for closings.”

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Takeaways If You Classify Your Loan Officers As Exempt

Takeaways• If your loan officer is classified as exempt, confirm

applicability of the exemption test for the specific exemption(s) relied on

• Be aware of the parameters and limitations of the specific exemption(s) relied on, and what information may be required to establish the exemption applies

• If in doubt, consider an internal review of exempt classifications (and possibility of conducting the review under protection of attorney‐client privilege)

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If Your Loan Officers Are Classified as Non‐Exempt . . .

If an employer classifies its loan officers as non‐exempt, it should take the time to examine pay practices including the following:

– Are loan officers receiving overtime, and are they receiving meal and rest periods where required by state law, such as California?

– For overtime purposes, are employers calculating the regular rate of pay correctly for these employees?

– Are employers including the appropriate compensation in the regular rate for purposes of calculating overtime pay?

– If loan officers are paid on a commission basis, is the commission being paid correctly?

– Are employers complying with ever-evolving federal and state laws regarding commission plans?

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If Your Loan Officers Are Paid Commissions . . .

If You Are Paying Your Loan Officers On A Commission Basis, Among Other Things, You should be Aware that:

– While California’s commissioned sales exemption may exempt applicable employees from California’s overtime requirements, it does not exempt them from other provisions of California’s wage and hour laws, like meal periods, and rest periods requirements for instance, or record keeping requirements re shift and meal period start and end times.

– As of January 1, 2013, California Labor Code § 2751 requires commission plans to be in writing, setting forth the method by which commissions are computed and paid.

– Employers must provide a signed copy to all employees who are parties to it, and obtain a signed receipt.

– If plan expires and employee continues to work, the plan is presumed to remain in full force and effect until superseded by another plan or employment terminates.

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Disputes can arise over whether employee is entitled to additional commission payments after termination

Nein v. HostPro (2009) 174 Cal.App.4th 986 • Court denied post‐termination commissions based on provision

that employee will be eligible for commission pay “so long as [he] remains employed with the Company as a Sales Representative”

DLSE Position• Commissions are to be paid when they are earned and

ascertainable, which may result in payment post‐termination


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Commission Plan Terms• Clear and unambiguous verbiage

• Criteria for eligibility for a commission

• Precise definition of how commission is calculated» Percentage of: sale price, revenue received, etc.

» What happens if customer cancels, returns, fails to pay

• Conditions that all must be satisfied before a commission is considered “earned”

» Ongoing duties to service account after booking?

• Description of when commissions are paid » Due when earned and ascertainable

» Advances, draws, chargebacks


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Are employers who pay their loan officers commissions complying with federal and state laws concerning the payment of commissions, such as:

– Dodd‐Frank’s 2013 amendments to the Truth in Lending Act concerning loan officer compensation?

– Armenta v. Osmose, 135 Cal. App. 4th 314 (2005) and progeny


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Dodd‐Frank, Title XIV, Section 1403

– “[F]or any residential mortgage loan, no mortgage originator shall receive from any person and no person shall pay to a mortgage originator, directly or indirectly, compensation that varies based on the terms of the loan (other than the amount of the principal).“

– This provision, known as the "Prohibition on Steering Incentives," is a central part of Dodd‐Frank. The purpose of the provision, as its name indicates, is to eliminate any incentive for a mortgage originator to "steer" a consumer toward a specific type of loan. It accomplishes this goal by mandating that mortgage originators shall not be compensated differently for mortgage loans with different terms (higher interest rates, for example).

– Thus, loan originators may not pay loan officers or brokers commissions that vary based on the terms of the loan, other than the amount of the principal.


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Armenta v. Osmose, 135 Cal. App. 4th 314 (2005)

• Employers should be aware of recent California Appellate Court decisions that attempt to expand upon a 2005 appellate decision in Armenta. These cases generally involve compensation structures where employees are paid purely on a commission or piece‐rate basis.

• Armenta essentially holds that employers may not average commission pay or piece rate pay over the course of a pay period to meet minimum wage requirements. Rather, minimum wage requirements affix for each hour worked.

• Employers must pay employees for non‐productive time, including paid rest breaks, and for time where they are prevented from earning sales‐related or production‐based pay.

• These issues have been addressed in recent cases such as Bluford v. Safeway, Inc., 216 Cal. App. 4th 864 (2013), Gonzalez v. Downtown L.A. Motors, 215 Cal. App. 4th 36 (2013) and Balasanyan v. Nordstrom, Inc., 913 F.Supp. 2d 1001 (S.D. Cal 2012).


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Takeaways If Your Loan Officers Are Paid Commissions . .

Takeaways• If You Pay Loan Officers Commissions in California, Your Commission Plans

Must, At Minimum, Adhere to the Following, Among Other Things:– Written commission plan

– Employee signs acknowledgement of receipt

– New plan is issued before previous plan expires

– Clear, precise, thorough, unambiguous plan terms

• “Commission‐only” plans are becoming increasingly risky

• Consider hybrid compensation structure, commissions in combination with hourly or other type of pay

• Consider providing separate compensation (at least minimum wage) for non‐sales time: i.e., pre‐opening, post‐closing, administrative meetings, rest breaks, nonproductive work time, performing tasks not directly related to sales activities

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Takeaways For Today

• Following the Supreme Court’s decision in Perez, employers should re‐examine their classification and pay practices with respect to their loan officers.

• How are employers classifying their loan officers – as exempt or non‐exempt?• If exempt, do these employees meet some other federal or state exemption or

are their duties atypical?• If non‐exempt, are they being paid in accordance with federal and state wage

and hour laws. • Employers should revisit pay practices and in particular, commission pay

practices.• The Perez decision does not mean that employers may not classify loan

officers as exempt if the loan officers’ duties fit squarely within an exemption. Perez simply underscores the importance of keeping pace with the changing legal landscape to ensure compliance with stringent federal and state wage and hour requirements.

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Questions?

Robert Cooper Ruth L. SeroussiBuchalter Nemer PC Buchalter Nemer PC1000 Wilshire Blvd., Suite 1500 1000 Wilshire Blvd., Suite 1500Los Angeles, California 90017 Los Angeles, California 90017Direct: (213) 891‐5230 Direct: (213) 891‐5149Email: [email protected] Email: [email protected]

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loan officers: are you classifying them properly, or walking into a … perez v. mortgage bankers...

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