Originator Overtime

“Whatever you think you know about paying your loan officers from the people you spoke to or where you worked before … stop. Throw it all out,” declared Roy DeLoach, NAMB’s vice president of Government Affairs.

DeLoach was joined by Fortney & Scott attorneys David S. Fortney and Leslie Stout-Tabackman at a panel session on wage and hour requirements under the federal Fair Labor Standards Act.

Many mortgage employers have relied on information from the Internal Revenue Service in deciding how to classify their workers — but an employer can be in compliance under IRS rules and in violation of DOL regulations, the panelists noted.

Most brokers and loan officers should be classified as employees, not independent contractors although industry practice is to treat them as independent contractors. The Fair Labor Standards Act, the federal law mandating how employers must compensate employees, defines employee broadly.

Stout-Tabackman suggested that employers check NAMB’s Wage and Hour Compliance Assistance link on its Web site for the seven-part test used by DOL to determine if a worker is an employee. Whether a worker is an employee is often determined by the “economic reality” of the working relationship and not by labels, job titles or by agreements between the employer and the worker, according to written materials supplied at the conference by the law firm.

As a result, paying a worker as an independent contractor and using a Form 1099 rather than paying W-2 employee wages that are subject to payroll taxes does not assure that the worker is an independent contractor instead of an employee under the FLSA. “In other words, 1099 is not the way to go. It doesn’t matter if you want to do it that way or your employees want to do it that way,” Stout-Tabackman said.

Indeed, many mortgage company employers have been baffled when hit with a DOL enforcement action, arguing that brokers’ and loan officers’ jobs are similar to real estate agents who have an exemption through the IRS and thus can be classified as independent contractors. But the IRS has not given such an exemption to the mortgage industry and has even issued an advisory memorandum indicating that mortgage loan officers are employees and not independent contractors, the panelists noted.

Everyone on staff should be paid minimum wage and overtime, Stout-Tabackman said. The federally required minimum wage is $5.15 an hour but, because it is a minimum requirement, many states have modified the hourly wage and require employers to pay more. Check state law, she advised.

Overtime pay should equal at least one and one-half times the employee’s regular hourly rate unless the employee is exempt from overtime requirements. Overtime pay must be paid to employees even if the employee does not receive approval before doing the extra work.

The government has collected back pay from employers who defended the lack of pay by arguing that employees were not supposed to work overtime or even that the employer did not know that the extra work was being done. The labor act requires that if an employer “suffers or permits” workers to work, then they must be paid. The best way to handle such a situation is to have a rule in the employee manual that says that an employee can not work overtime without prior permission. If the rule is violated, the employee should be disciplined, the panelists noted.

So far, application of exemptions against the minimum wage and overtime requirements has eluded mortgage brokers. However, NAMB sent a letter to DOL in September 2005 seeking advice on whether the outside sales exemption applies to mortgage brokers and loan officers. The opinion letter will be excellent for businesses to keep on hand because if followed in good faith, it provides an absolute defense in case a business is sued or investigated by DOL, the panelists said.

In applying the exemption, there are two important points to consider. First, the employee’s primary duty must be making sales, an easy enough requirement for the industry to meet, Stout-Tabackman said. Second, the employee must “customarily and regularly be engaged away from the employer’s place of business.” Working from home is the same as working at the employer’s business, she warned, adding that is an important point to keep in mind. Loan officers should spend 50-60 percent of their time, depending on what is said in DOL’s upcoming letter, away from their home offices. Things that will count toward that requirement are the things most people are doing anyway to bring in business, she continued.

The retail sales exemption is a “dead issue” for brokers because of case law and DOL’s view that brokers do not qualify. DOL regulations list what makes up a retail sales business, the mortgage brokerage industry is not mentioned even though the financial services industry is listed. However, a federal court in Illinois recently recognized the exemption for the first time as applicable to the mortgage brokerage industry, DeLoach said. NAMB will be following this to see if it is overturned on appeal and, perhaps, trying to see if the case can be used to have DOL apply the exemption to all brokers, he said.

The panelists also said that a couple of other trends are important to note. DOL is stepping up its collection of civil penalties while plaintiffs’ attorneys are asking for more and more types of damages. “The stakes are high,” Stout-Tabackman said.

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Lisa D. Burden is a legal analyst for MortgageDaily.com and holds a law degree from the University of Maryland. She is currently a freelance journalist who previously wrote for Institutional Investor publications and the Baltimore Daily Record.