• Loan Underwriters Must Be Paid Overtime under Federal Law
  • December 8, 2009 | Author: John F. Adkins
  • Law Firm: Bingham McCutchen LLP - Boston Office
  • The U.S. Court of Appeals has just ruled that, under the Fair Labor Standards Act (FLSA), particular loan underwriters must be paid overtime -- at time and one-half their regular rate of pay for all hours worked over 40 in a week -- because they do not qualify as exempt administrative employees.

    The FLSA has five so-called “white collar” exemptions to its overtime requirement: executive, administrative, professional, certain computer professions or outside salesperson.1 Under Department of Labor regulations, an exempt administrative employee is one who:

    • is salaried, paid at least $455/week ($23,660/year), and
    • has a primary duty which:
      • 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
      • includes the exercise of discretion and independent judgment with respect to matters of significance.2 

    Work directly related to the management or general business operations means work directly related to assisting with running or servicing the business, as distinguished, for example, from working on a manufacturing production line or selling a product in a retail or service establishment.3 -- This administrative/production dichotomy distinguishes between the actual production or sale of goods and services which constitute the business’s marketplace offerings, and work which contributes to running the business which produces and sells those goods and services. In the financial services industry, the dichotomy is often described as the difference between giving advice and making sales:

    Employees in the financial services industry generally meet the duties requirements for 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. However, an employee whose primary duty is selling financial products does not qualify for the administrative exemption.4

    In its decision, the court found that:

    • The loan underwriters evaluated whether to issue loans to individual loan applicants by referring to a detailed set of written guidelines.
    • The guidelines specified how underwriters should determine loan applicant characteristics such as qualifying income and credit history, and instructed underwriters to compare such data with criteria, also set out in the guidelines, prescribing what qualified a loan applicant for a particular loan product.
    • The bank also provided supplemental guidelines and product guidelines with information specific to individual loan products.
    • An underwriter was expected to evaluate each loan application under the guidelines and approve the loan if it met the written standards.
    • The court concluded that this work fell on the production and sales side of the administrative/production dichotomy:

    [The underwriters’] primary duty was to sell loan products under the detailed directions....There is no indication that underwriters were expected to advise customers as to what loan products best met their needs and abilities. Underwriters were given a loan application and followed procedures specified...in order to produce a yes or no decision. Their work is not related either to setting “management policies” nor to “general business operations” such as human relations or advertising, but rather concerns the “production” of loans -- the fundamental service provided by the bank.


    We conclude that the job of underwriter as it was performed...falls under the category of production rather than of administrative work. Underwriters...performed work that was primarily functional rather than conceptual. They were not at the heart of the company’s business operations. They had no involvement in determining the future strategy or direction of the business, nor did they perform any other function that in any way related to the business’s overall efficiency or mode of operation. It is undisputed that the underwriters played no role in the establishment of [the] credit policy. Rather, they were trained only to apply the credit policy as they found it, as it was articulated to them....

    The court noted that particular work can be administrative or production depending on where it is done:

    A clothing store accountant deciding whether to issue a credit card to a consumer performs a support function auxiliary to the department store’s primary function of selling clothes. [The bank] underwriter, by contrast, is directly engaged in creating the “goods” -- loans and other financial services -- produced and sold by [the bank]....An employee whose job is to evaluate credit who works in the credit industry is more likely to perform a production job....Employees who evaluate and extend credit on behalf of a company that is not in the credit industry -- extending credit in order to allow customers to purchase a tangible good that the employer manufactured, for example -- are generally considered administrative employees.

    Because they were found to be engaged in production rather than administrative work, the court did not have to consider whether the loan underwriters exercised sufficient independent discretion and judgment.

    Employers should review their exempt payrolls and use caution when classifying employees as exempt. Employers are liable for two or three years of back overtime pay5 to employees and former employees determined to have been misclassified, as well as for plaintiffs’ attorneys’ fees. The situation may be aggravated if an employer has not kept the required time records for its misclassified “exempt” employees -- in which case plaintiffs may rely on “secondary sources” (i.e., the employees' recollection) as to how much overtime they worked in the prior two or three years. The plaintiffs’ bar is well aware of the value of such an action brought on behalf of a group of employees.


    1 29 C.F.R. §§541.0-541.602.
    2 29 C.F.R. §541.200.
    3 29 C.F.R. §541.201.
    4 29 C.F.R. §541.203(b).
    5 Two years’ back pay for a “nonwillful violation”; three years for a “willful violation.”