Phillip S. Oberrecht

Recent Case

The Ninth Circuit Federal Court of Appeals has recently ruled in Gina McKeen-Chaplin v. Provident Savings Bank, FSB (July 5, 2017) that mortgage underwriters working for a bank that sells mortgage loans to borrowers, and then resells the funded loans on the secondary market, are not exempt from the overtime provisions of the Fair Labor Standards Act.

The FLSA requires payment of time and a half for hours an employee works over forty in one week, unless that employee is exempt as a bona fide executive, administrative or professional employee.  The Gina McKeen-Chaplin case dealt with the administrative exemption only. 

The Secretary of Labor has formulated a "short duties test" to determine if an employee qualifies as  administrative for exemption purposes.  An employee is exempt if the employee (1) is compensated at least at the minimum level ($913 per week, $1,826 biweekly, $1,978 semimonthly, or $3956 monthly,  exclusive of board, lodging or other facilities until a new rate is published), (2) has as the primary duty 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) that primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.  (See 29 C.F.R. §541.200)

In making its ruling the Court made it clear that the FLSA should be "liberally construed to apply to the furthest reaches consistent with Congressional direction" and exemptions "are to be withheld except as to persons plainly and unmistakably within their terms and spirit."  The determination is not always easy and requires careful consideration of the specific requirements of the exemption.  As such, the Court noted that two other Federal Circuits had ruled on the issue of whether mortgage underwriters in similar circumstances should be considered as exempt administrative employees.  The Second Circuit ruled that mortgage underwriters were not administrative employees while the Sixth Circuit ruled they were. 

In the Gina McKeen-Chaplin case, the Ninth Circuit considered the duties of the Provident Savings Bank mortgage underwriters and found that it was undisputed that the salary requirements were met, but the second requirement (primary duty of office or non-manual work relating to the management or general business operations of the employer or the employer's customers) was not. 

The Court stated that the "employee must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example, from working on the manufacturing production line or selling a product in a retail or service establishment."  This is referred to as the "administrative-production dichotomy."  Its purpose, according to the Court, is "to distinguish between work related to the goods and services which constitute the business' marketplace offerings and work which contributes to 'running the business itself.'"  In a prior case, the Ninth Circuit had stated:  "[t]his requirement is met if the employee engages in 'running the business itself or determining its overall course or policies,' not just in the day-to-day carrying out of the business' affairs." 

In this case, the Ninth Circuit found that the Provident underwriters made a determination of the creditworthiness of a borrower based on information obtained by the loan processor, but only after the information was run through an automated underwriting system and a preliminary computer decision was produced.  The underwriters applied the same guidelines used by the computer program to ensure  the decision was sound.  The underwriters said, however,  that the funding of a loan depended ultimately on factors beyond the underwriters' control. 

The Ninth Circuit summarized its finding by saying:  "Provident's mortgage underwriters do not decide if Provident should take on risk, but instead assess whether, given the guidelines provided to them from above, the particular loan at issue falls within the range of risk Provident has determined it is willing to take."  It stated:  "...we conclude that...mortgage underwriters who implement guidelines designed by corporate management, and who must ask permission when deviating from protocol, are most accurately considered employees responsible for production, not administrators who manage, guide, and administer the business."

The Court did not have to consider the final part of the "short duties test", the exercise of discretion and independent judgment with respect to matters of significance, since the exemption claim failed to satisfy the second part of the test.

Declare an Exemption Only After Careful Analysis

The determination of whether or not an employee meets the administrative exemption can be detailed and tricky as exemplified by this case.  All three prongs of the "short duties test" must be satisfied and the exemption will be applied only when its requirements are plainly and unmistakably met.  To aid in this determination, the Secretary of Labor has identified numerous examples in 29 C.F.R §541.203, and given explanations of the duties for such employees that would, and would not, tend to qualify them for the exemption.  In particular, the regulation discusses insurance claims adjusters; appraisers; financial services industry employees of many types; team leaders in purchasing, selling or closing all or part of a business, negotiating real estate transactions or collective bargaining agreements; executive assistants; administrative assistants; human resources managers; personnel clerks; purchasing agents; inspectors; examiners; graders; comparison shoppers; buyers; investigators; and others. 

After you have done your best to apply the test for the exemption, run your decision past your favorite employment lawyer.  The time and effort will be well spent.