On July 5, 2017, the Ninth Circuit, on appeal from the Eastern District of California, issued a ruling reversing the district court's grant of summary judgment in favor of a defendant Bank, holding, contrary to the district court, that mortgage underwriters were not administratively exempt under the Fair Labor Standards Act.
In the case, the defendant Bank sold mortgage loans to consumers and then resold the funded loans on the secondary market. The job of the mortgage underwriters was to review mortgage loan applications using guidelines established by the Bank and investors in the secondary market, and to analyze complex customer loan applications and determine borrower creditworthiness in order to ultimately decide whether the Bank would accept the requested loan. The underwriters were also allowed to suggest additional conditions or request exceptions from the standard guidelines.
At issue in the case was whether the employees met the second prong of the administrative duties test: performing as a primary duty "office or non-manual work related to the management or general business operations of the employer or the employer's customers." The Court found that "because the underwriters' duties go to the heart of [the Bank's] marketplace offerings, not to the internal administration of [the Bank's] business, [the Bank] cannot prove that the mortgage underwriters qualify for the administrative exemption."
Specifically, the Ninth Circuit held that the administrative exemption did not apply to the underwriters because their primary job duty did not relate to their employer bank's management or general business operations. The Court stressed that to satisfy the second requirement, "an employee must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example, from working on a manufacturing production line or selling a product in a retail or service establishment." The critical distinction is "between work related to the goods and services which constitute the business' marketplace offerings and work which contributes to running the business itself."
The Court noted that the Second and Sixth Circuits have both analyzed whether mortgage writers are administratively exempt and have come to opposite conclusions, with the Second Circuit holding that "the job of underwriter . . . falls under the category of production rather than of administrative work," and the Sixth Circuit holding that mortgage underwriters are exempt administrators, because they "perform work that services the Bank's business, something ancillary to [the Bank's] principal production activity." The Ninth Circuit decided that the Second Circuit's analysis should apply because the mortgage underwriters do not decide if the Bank 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 the Bank has determined it is willing to take. The Court noted that "assessing the loan's riskiness according to relevant guidelines is quite distinct from assessing or determining [the Bank's] business interests."
Although the Court found that the mortgage underwriters are essential to the Bank's business, according to the Ninth Circuit, "the question is not whether an employee is essential to the business, but rather whether her primary duty goes to the heart of internal administration—rather than marketplace offerings."
This case serves as an important reminder for employers that when deciding if an employee falls under the administrative exemption, it is essential to evaluate whether the employee performs functions that relate to the business' market offerings, even if those offerings are services rather than products, or truly performs services that contribute to running the business itself.
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