Ninth Circuit Holds Mortgage Underwriters are Entitled to Overtime Under the Fair Labor Standards Act

Today, the Ninth Circuit held in McKeen-Chaplin v. Provident Savings Bank that mortgage underwriters are entitled to overtime compensation under the federal Fair Labor Standards Act (“FLSA”). The McKeen-Chaplin opinion clarifies the legal analysis for evaluating whether an employer has met the second prong of the administrative exemption test under the FLSA by strongly endorsing the “administrative-production dichotomy.”[1] McKeen-Chaplin, No. 15-16758, 2017 WL 2855084, at *7 (9th Cir. July 5, 2017) (“McKeen-Chaplin”). Under the administrative-production dichotomy framework, “whether [an employee’s] primary duty goes to the heart of internal administration—rather than marketplace offerings” is the key test in determining whether an employer has met the second prong of the FLSA’s administrative exemption. Based upon this important precedent, generally speaking, if an employee’s duties are focused on the core business of a company – like underwriters, working on a bank’s mortgage products – then the employee is not administratively exempt, and is entitled to overtime.

All employees are guaranteed minimum and overtime compensation under the FLSA unless their job duties fall under a specific exemption, such as the administrative exemption. McKeen-Chaplin, at *2. The burden is on the employer to show that a particular exemption defense “plainly and unmistakably” applies to a particular job position. Id. For the administrative exemption to apply, an employee must:

(1) be compensated not less than $455 per week;

(2) perform as her primary duty office or non-manual work related to the management or general business operations of the employer or the employer’s customers; and

(3) have as her primary duty the exercise of discretion and independent judgment with respect to matters of significance.

McKeen-Chaplin, at *3. An employer must completely satisfy all three prongs of this test for the administrative exemption to apply (i.e., for an employer to avoid paying overtime and minimum wage compensation by claiming the administrative exemption applies to its workers). Id.

In McKeen-Chaplin, the Ninth Circuit held that mortgage underwriters are entitled to overtime under the FLSA. In so holding, the Court summarized the operative facts as follows:

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. Assessing the loan’s riskiness according to relevant guidelines is quite distinct from assessing or determining Provident’s business interests. Mortgage underwriters are told what is in Provident’s best interest, and then asked to ensure that the product being sold fits within criteria set by others.

Id. at *4.

In other words, because mortgage underwriters follow their employer’s policies to produce their employer’s products and do not set the employer’s policies or determine their employer’s business objectives, the employer failed to meet the second prong of the three-part administrative exemption test. Because the employer failed to meet all three prongs of the administrative exemption test, and no other exemption applied, the Ninth Circuit held that mortgage underwriters are entitled to overtime compensation.

The Ninth Circuit rejected the lower court’s reasoning that mortgage underwriters performed “quality control” work as a basis to assert that they engaged in work directly related to the company’s management or general business operations. Id. at **6-7. The Ninth Circuit noted, as a factual matter, that the employer maintains a separate, multi-step quality control process which “is not staffed by mortgage underwriters.” Id. at *6.

To drive home the point that merely because a “role bears a resemblance to quality control” does not make such a position exempt from overtime/minimum wage protections, the Ninth Circuit analogized the duties of mortgage underwriters to the undisputedly non-exempt “assembly line worker who checks whether a particular part was assembled properly.” Id. at *7. Even though an assembly line worker inspects a widget on the assembly line to ensure it meets the standards of the employer, the assembly line worker – like the underwriters in McKeen-Chaplin - nevertheless is bound by the product quality standards set by the employer.

Unless employees’ job duties “plainly and unmistakably” make them “administrators or corporate executives” responsible for the employer’s “internal administration,” employers may not avoid paying overtime by classifying them as exempt using the administrative exemption. Id. at **2, 7.

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If you have concerns that you may have been incorrectly classified as an exempt employee and deprived of overtime pay, then please contact Bryan Schwartz Law.

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[1] The Ninth Circuit was careful to acknowledge that “the [administrative-production] dichotomy is only determinative if the work falls squarely on the production side of the line.” McKeen-Chaplin, at * 4 (citing 69 Fed. Reg. 22122, 22141 (Apr. 23, 2004).

In addition, because the Ninth Circuit decided this case solely with respect to the second prong of the administrative exemption test, it did not need to address prong (3), i.e., whether mortgage underwriters have as their primary duty the exercise of discretion and independent judgment with respect to matters of significance. McKeen-Chaplin, at *1 n. 1.

On Remand, Ninth Circuit Holds that Car Service Advisors Do Not Fall within the Fair Labor Standards Act’s Car Salesman Exemption from Overtime Pay (Overturned by the United States Supreme Court in Encino Motorcars, LLC v. Navarro 584 U. S. ____ (2018))

Update: On April 2, 2018, the United States Supreme Court overturned the Ninth Circuit's decision in Encino Motorcars, LLC v. Navarro 584 U. S. ____ (2018).
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On January 9, 2017 the Ninth Circuit held that car service advisors do not fall within the exemption from overtime-compensation for “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles” provided in § 213(b)(10)(A) of the Fair Labor Standards Act (“FLSA”). (Navarro v. Encino Motorcars, LLC, No. 13-55323, Slip Op. 4 (9th Cir. 2017)).

Individuals working as “service advisors” filed an FLSA overtime action against their employer, a dealership that sells and services new and used cars. Plaintiffs alleged that service advisors’ duties include: greeting car owners as they arrive at the dealership’s service area; evaluating cars’ repair and maintenance needs; suggesting services for cars; writing up estimates; and following up with customers. (Slip Op. 4-5)

The U.S. District Court for the Central District of California dismissed the overtime claim. Thus began the case’s long appellate journey. Initially, the Ninth Circuit reversed, holding that a 2011 regulation by the Department of Labor reasonably interpreted § 213(b)(10)(A) to exclude service advisors. The Supreme Court held that the Ninth Circuit’s first decision erred by relying on the 2011 regulation and vacated the decision. The Court then remanded to the Ninth Circuit to construe § 213(b)(10)(A) without deferring to the 2011 regulation. (Slip Op. 5)

On remand the Ninth Circuit performed a detailed inquiry into the text and legislative history surrounding § 213(b)(10)(A). After reviewing “the ordinary meaning of the exemption’s words and the rule that we must interpret exemptions narrowly,” the court concluded, “we are convinced that Congress intended to exempt only salesmen selling cars, partsmen servicing cars, and mechanics servicing cars.” (Slip Op. 23)

However, assuming for the sake of argument that the FLSA’s language leaves room for ambiguity, the court examined the legislative history of the amendments and held that “Congress did not intend to exempt service advisors.” The legislative history for the operative amendments to § 213(b)(10)(A) “reveal[s] clear concerns with applying the overtime-compensation requirement to exactly three categories of a dealership’s employees: automobile salesmen, partsmen, and mechanics. The extensive legislative record . . . contains hardly a mention of service advisors, and the few references that exist display no concern about overtime compensation for service advisors.” On these bases, the Court held that Congress did not intend to exempt service advisors. (Slip Op. 31)

In ruling that Congress did not intend to include service advisors within the § 213(b)(10)(A) exemption, the Ninth Circuit maintains a split with the Fourth and Fifth Circuits as well as the Supreme Court of Montana, each of which has held that car services advisors were exempt from overtime. Walton v. Greenbrier Ford, Inc., 370 F.3d 446 (4th Cir. 2004); Brennan v. Deel Motors, Inc., 475 F.2d 1095 (5th Cir. 1973); Thompson v. J.C. Billion, Inc., 294 P.3d 397 (Mont. 2013). Navarro's journey may include another trip to the Supreme Court.