Wednesday, July 5, 2017

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.

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.

[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.

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