Among the various "exemptions" from the overtime compensation requirements of the Fair Labor Standards Act (FLSA) are "administrative" employees. The question presented in a recent decision by the 9th Circuit—which covers Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington—was whether mortgage loan underwriters who work for lending banks fit the administrative exemption.

In the last 8 years, two other federal courts of appeal have disagreed over the answer to this question. The 2nd Circuit found that they don't, and the 6th Circuit found that they do. How did the 9th Circuit rule?

Administrative Exemption Requirements

There are three requirements an employee must meet to qualify for the administrative exemption:

1. The employee must be paid a salary of at least $455 per week;
2. The employee's primary duty must be "office or non-manual work related to the management or general business operations" of the employer or its customers; and
3. The employee's primary duty must involve the "exercise of discretion and independent judgment with respect to matters of significance." As with other overtime exemptions, the administrative exemption is narrowly construed, with the employer having the burden of proving that the exemption applies. Also, all three requirements must be met; failing to satisfy one of them means the employee isn't exempt. Of the three requirements, only the first is relatively straightforward, however. The second and third are notoriously difficult to apply.

Work of Mortgage Loan Underwriters

The employer of the underwriters was Provident Savings Bank. The bank provides loans to customers who purchase homes or refinance existing home loans. It then sells those loans on the secondary market. The role of the mortgage underwriters is to decide whether the customer's application, documentation, and creditworthiness satisfy the bank's criteria—the "guidelines"—for the particular type of loan being sought.

The underwriters can add other conditions to be satisfied before the loan is approved, and they can suggest a "counteroffer" when the customer doesn't qualify for the desired loan but may qualify for a different loan. They can also request that the bank make an exception in an individual case by approving a loan that doesn't satisfy the guidelines. However, they don't deal directly with the customer, they don't handle the sales on the secondary market, and they have no role in setting the bank's loan guidelines.

Does Their Work Satisfy Second Requirement?

According to the regulations under the FLSA, "work related to the management or general business operations" of the employer—the second of the three requirements of the administrative exemption—means that "an employee must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example, from working on a manufacturing production line or selling a product in a retail or service establishment."

That distinction is commonly referred to as the "administrative production dichotomy." Its purpose, according to the U.S. Department of Labor (DOL), 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.'" If the employees engage in running the business itself or determining its overall course or policies, they would meet this requirement, but those whose work is the day-to-day carrying out of the business' affairs don't.

Applying this distinction, the court concluded that the mortgage underwriters fell clearly on the "production" side of the line and were thus nonexempt. The court relied on the fact that the underwriters didn't decide whether the bank should take on a risk; their role was limited to assessing whether a particular loan satisfied the guidelines established by the bank.

Their role in assessing a loan's riskiness was quite different from assessing or determining the loan guidelines themselves or the bank's other business policies. Because the underwriters didn't meet the second requirement, it wasn't necessary for the court to consider their argument that they also failed to meet the third requirement.

The court sent the case back to the trial court to enter judgment in favor of the underwriters. McKeen-Chaplin v. Provident Savings Bank, FSB, Case No. 15-16758 (9th Cir., July 5, 2017).

A Note of Caution

Because the underwriters weren't exempt, the bank will be liable for overtime compensation that should have been paid to them for all hours they worked in excess of 40 in a week, retroactively to 2 or 3 years before the lawsuit was originally filed, plus prejudgment interest and attorneys' fees. Determining the exact amount of overtime compensation owed may prove to be difficult because the bank, believing that its underwriters were exempt, probably didn't keep accurate records of the hours they worked.

This case demonstrates the uncertainties employers face when attempting to apply the administrative exemption. It is by far the most challenging of the FLSA's exemptions. Care also must be taken to comply with any applicable state-law requirements because they may be even more challenging than the federal requirements.

For more information on wage and hour risks join Chris Scanlan of Arnold & Porter Kaye Scholer as he presents the breakout session—“Wage and Hour Alert: New Compliance Risks Under Equal Pay Legislation, 2-Tier Minimum Wage System, Court Rulings on Breaks and On-Call Time, and More”—at the 12th annual California Employment Law Update (CELU), being held at the Westin South Coast Plaza in Costa Mesa, California, October 11-13. Click here to learn more, or to register today.

This article originally appeared in California Employment Law Letter.