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Are loan originators outside salespeople?

National Mortgage Professional
Mar 24, 2014

Are loan originators outside salespeople? Diane L. SliferFair Labor Standards Act, primary duty

An important and costly distinction under the Fair Labor Standards Act

Consumer lending/retail banking update
In recent cases brought against financial services companies, loan originators and certain other workers have alleged that they were incorrectly classified as exempt outside salespeople and therefore did not receive overtime pay as required under the Fair Labor Standards Act (FLSA). These cases have caught the attention of the financial services industry, and in response to an inquiry submitted by the National Association of Mortgage Brokers, the U.S. Department of Labor (DOL) recently addressed whether "sales force" mortgage loan officers qualified as exempt outside sales employees under FLSA.

Under FLSA, if an employee meets the criteria of an outside salesperson, the employer is exempt from complying with the FLSA minimum wage and overtime pay requirements. FLSA regulations define an outside salesperson as an employee:

Whose primary duty is:
-Making sales within the meaning of section 3(k) of FLSA, or
-Obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and
-Who is customarily and regularly engaged away from the employer's place or places of business in performing such primary duty [emphasis added].

"Primary duty" means "the principal, main, major or most important duty that the employee performs." The phrase "customarily and regularly" means a frequency that must be greater than occasional but which may be less than constant. Tasks or work performed "customarily and regularly" includes work normally and recurrently performed every workweek; it does not include isolated or one-time tasks.

An employee "engaged away from the employer's place of business" means an employee who makes sales at the customer's place of business or, if selling door-to-door, at the customer's home. "Outside sales" does not include sales made by mail, telephone or the Internet unless such contact is used merely as an adjunct to personal calls. Outside sales employees may perform promotional work as an exempt outside sales activity if it "is actually performed incidental to and in conjunction with an employee's own outside sales or solicitations."

In its letter, DOL stated that "employees of finance companies who obtain and solicit mortgages may be exempt outside sales employees if they are 'customarily and regularly engaged away from their employer's place of business in obtaining mortgages from brokers and individuals.'" Furthermore, "[w]ork incidental to the employee's obtaining the mortgage, such as obtaining credit information from the mortgagor before and after the sale, would qualify as exempt work if done with respect to [the employee's] own sales."

DOL found that the loan officers at issue in the letter were qualified exempt outside salespeople. As detailed by DOL, the loan officers:

-Performed their work primarily outside the employer's office;
-Spent a significant amount of time away from their employer's place of business meeting with prospective customers at locations other than the employer's business, such as a client's home, and making in-person calls on real estate agents and brokers, financial advisors and other potential referral sources;
-Were responsible for originating their own sales by contacting prospective clients and developing and monitoring referral sources; and
-Had considerable flexibility to set their working hours and to schedule the tasks they perform during the workday.

DOL concluded that such loan officers appeared to meet the requirements for the outside sales exemption under the FLSA. The loan officers met the making sales requirement and had the primary duty of selling loan packages. Additionally, by meeting clients outside of the employer's place of business in order to initiate sales, the "customarily and regularly engaged away from the employer's business" factor was met. The Department noted that the loan officers could qualify for the outside sales exemption even though they may perform some activities at their employer's place of business "so long as the inside sales activity is incidental to and in conjunction with qualifying sales activity."

DOL stressed that each employee had to be evaluated on an individual basis to determine whether he qualifies for the outside sales exemption; therefore, financial service providers need to assess each employment arrangement separately.

At about the same time DOL issued its letter, Premium Mortgage Inc., a Missouri mortgage company, lost its motion for summary judgment in Belton v. Premium Mortgage Inc., a case in which loan originators sought recovery of unpaid overtime compensation, unpaid minimum wage compensation, liquidated damages, attorneys' fees and costs. The mortgage company claimed that the loan originators qualified as exempt employees under the outside salesperson exemption of FLSA and, therefore, the loan originators were not entitled to overtime pay. The loan originators claimed that they were directed to be in the office during regular business hours where they made sales calls from a designated work area. The loan officers also claimed that they rarely spent more than three to four hours per week on outside sales calls and that they were required to answer phones, set up files, assemble office furniture and perform other on-site work related to the mortgage company's rental property business.

This case brought by loan originators and the letter from DOL make it clear that a financial services company must take a close look at which employees, including loan officers, the company is classifying as exempt outside salespeople under FLSA. Spending effort and time on this issue now may help to prevent costly litigation in the future.

Diane L. Slifer is an attorney with the law firm of Blank Rome LLP and a member of its consumer financial services/retail banking group. She concentrates her practice on all aspects of residential mortgage, consumer loans and related transactions, including federal and state regulatory compliance. She can be contacted at [email protected].

Mar 24, 2014