Mortgage Underwriters: Deciphering Exempt Status Under the FLSA's Enigmatic Administrative Exemption.

Author:Goodnight, Austin
Position:Fair Labor Standards Act
  1. INTRODUCTION 629 II. BACKGROUND 630 A. The Fair Labor Standards Act 630 B. The Administrative Exemption to the FLSA 631 1. Who's in Charge: DOL's Wage and Hour Division 631 2. Evolution of the Administrative Exemption's 632 Requirements 3. The Administrative Exemption's Ambiguity 634 C. Circuit Split: Exempt Status of Mortgage Underwriters 634 Under the Administrative Exemption 1. Case Holding Mortgage Underwriters Exempt from FLSA 635 Protection Under Administrative Exemption 2. Cases Holding Mortgage Underwriters Non-Exempt from 635 FLSA Protection Under Administrative Exemption III. ANALYSIS 637 A. The Administrative-Production Dichotomy 637 B. The Duties Test 638 1. Directly Related to the Management or General 638 Business Operations 2. Exercise of Discretion and Independent Judgment with 640 Respect to Matters of Significance C. Scope of the Administrative Exemption 643 IV. RECOMMENDATION 645 V. CONCLUSION 647 I. INTRODUCTION

    The Fair Labor Standards Act (FLSA) exempts "administrative" employees from its protection. (1) Yet, ambiguity persists about who constitutes an "administrative" employee for the purposes of the exemption, (2) which has specifically led to a federal circuit split about the exempt status of mortgage underwriters. (3) This circuit split was recently extended by the Ninth Circuit in McKeen-Chaplin v. Provident Savings Bank, which ruled that mortgage underwriters should not be exempt under the FLSA administrative exemption. (4)

    Overall, this Note will advocate for a new analytical tool that should resolve any ambiguity over whether an employee qualifies for administrative exemption. Thus, this Note's purpose is broad, suggesting the creation of a new analytical instrument used for each case in which ambiguity arises. Because mortgage underwriters have recently fallen victim to the administrative exemption's ambiguity, however, this Note will illustrate the exemptions ambiguity and the suggested analytical tool throughout by focusing on resolving the mortgage underwriter's situation, ultimately suggesting a non-exempt status consistent with the Ninth Circuit's ruling in McKeen-Chaplin. However, this same analysis has a far broader application outside of this Note.

    First, this Note will provide background on the FLSA, the administrative exemption and its ambiguous nature, and what led to the circuit split. Second, this Note will analyze the specific duties of mortgage underwriters using the administrative-production dichotomy and guidance provided by the Department of Labor (DOL), ultimately concluding that their duties, though non-dispositive, fail to meet the requirements for the administrative exemption. Finally, this Note will analyze the scope of the administrative exemption, concluding that the exemption should be construed narrowly to create a presumption of non-exempt status when ambiguity is present, in part because of negative social and health consequences caused by high levels of mandatory overtime work. Confusion about the application of the administrative exemption's requirements has persisted too long, and this Note should lead to more efficient resolutions for employers and courts in all situations where this confusion arises, focusing specifically on mortgage underwriter confusion.


    This Note's background section will first discuss the history and purpose of the FLSA, will delve into the FLSA's administrative exemption, and will finally summarize the circuit split about the exempt status of mortgage underwriters under the administrative exemption.

    1. The Fair Labor Standards Act

      President Franklin Delano Roosevelt delivered a message to Congress in 1937, stating that "[o]ne third of our population... is ill-nourished, ill-clad, and ill-housed." (5) The Great Depression was decimating America's workforce and economy, motivating President Roosevelt's demand for Congress to create legislation that would aid "those who toil in factory and on farm." (6)

      On June 25, 1938, Congress complied with the President's request by enacting the FLSA. (7) The FLSA was designed to avoid "labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers." (8) Congress's twin aims in enacting the FLSA were to set a federal minimum wage and maximum hour requirement for American workers. (9) The FLSA specifically contains a provision requiring employers pay "a rate not less than one and one-half times the regular rate" to an employee for each hour worked in excess of the weekly statutory maximum. (10) The Department of Labor (DOL) regards the FLSA's overtime requirements as "among the nation's most important worker protections." (11)

      Although the FLSA's overtime protections are crucial for blue-collar workers, the protections were not intended to apply to white-collar workers. (12) White-collar workers had a "higher salary, potential for promotion, and greater job security," thus precluding their need for FLSA wage and overtime protection. (13) In addition, "the type of work they performed was difficult to standardize to any time frame and could not easily be spread to other workers after 40 hours in a week, making compliance with the overtime provisions difficult and generally precluding the potential job expansion intended by the FLSA's time-and-a-half overtime premium." (14)

      Specifically, the FLSA exempts from its protections "any employee employed in a bona fide executive, administrative, or professional capacity." (15) Attempting to decipher the scope of the three white-collar exemptions has been, and continues to be, an arduous task given their ambiguous character. (16)

    2. The Administrative Exemption to the FLSA

      1. Who's in Charge: DOL's Wage and Hour Division

        Congress originally gave the Secretary of Labor power to define the FLSA white-collar exemptions. (17) The Secretary of Labor subsequently transferred that power to the Administrator of the DOL's Wage and Hour Division. (18) Thus, the DOL's Wage and Hour Division, "created pursuant to section 4 of the FLSA, has primary responsibility for enforcing and administering" the FLSA. (19)

        The DOL has defined the FLSA's white-collar exemptions by periodically issuing both "regulations" and "interpretations." (20) Regulations, unlike interpretations, "are entitled to great weight and have been held to carry the full force of law." (21) Despite their controlling force, the DOL's regulations have been unable to resolve the ambiguity behind the FLSA's white-collar exemptions, especially the administrative exemption. (22)

      2. Evolution of the Administrative Exemption's Requirements

        In 1940, the DOL issued its first regulation, known as the "Stein Report," defining the requirements for the FLSA's white-collar exemptions. (23) Many revisions have occurred since the initial 1940's regulation, though the primary "structural framework" has remained. (24) The requirements include:

        (1) the employee must be paid a salary, not an hourly wage (the salary-basis test); (2) the amount of the employee's salary must indicate managerial or professional status (the salary-level tests); and (3) the employee's job duties and responsibilities must involve managerial or professional skills (the duties tests). (25) The administrative exemption's requirements reflect these general requirements. (26) Prior to 2004, the statutory "short test" for the administrative exemption required that the employee (1) receive compensation on a salary or fee basis of at least $250 per week; (2) have a primary duty that "involve[s] office or nonmanual... work directly related to management"; and (3) exercise "discretion and independent judgment" in their work. (27)

        However, courts thought these requirements for the administrative exemption were "anachronistic, difficult to apply, and burdened employers with the threat of massive liability." (28) If an employer wrongfully treated an employee as exempt, they would be on the hook for a substantial amount of back pay and liquidated damages. (29)

        Because the old administrative exemption requirements were difficult to apply, (30) the DOL promulgated new rules in 2004. (31) The DOL's 2004 regulation defined an exempt administrative employee as any employee

        (1) Compensated on a salary or fee basis at a rate of not less than $455 per week (or $380 per week, if employed in American Samoa by employers other than the Federal Government), exclusive of board, lodging or other facilities; (2) Whose primary duty 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 (3) Whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. (32)

        The new rule maintains the salary basis requirement, but it raises the minimum salary level to $455 per week, subjecting a greater number of people to FLSA overtime protection. (33) DOL's 2004 regulation also simplified the duties test for the administrative exemption by "defining individual responsibilities and by removing overly broad or vague requirements." (34)

        Although the DOL's 2004 regulation was perceived as a step toward bolstering the effectiveness of the administrative exemption, (35) the Obama administration felt the salary level requirement was still too low. (36) DOL attempted to amend its 2004 rule by issuing another regulation in 2016 that would have increased the administrative exemption's salary level requirement from $455 to $913 per week. (37) Despite DOL efforts to increase the salary level requirement, the 2016 rule was met with an injunction blocking its implementation. (38) Thus, for now, DOL's 2004 regulation remains the controlling rule governing the FLSA's administrative exemption. (39)

      3. The Administrative Exemption's Ambiguity

        The administrative exemption is arduous for employers and judges to apply. Since the first...

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