United States: Making A Mountain Of The Administrative/Production Dichotomy Molehill

Seyfarth Synopsis: Earlier this month, the Ninth Circuit chose to side with the Second Circuit, and not the Sixth Circuit, to opine that mortgage underwriters fail to meet the FLSA's administrative exemption from overtime test because underwriting duties "go to the heart of... marketplace offerings, not to the internal administration of" the mortgage banking "business." That is, their duties were found to fall on the "production side" of the tortuous, judicially created "administrative/production" dichotomy.

Selling loans is not a duty that satisfies the FLSA's administrative exemption test. But loan underwriters do not sell or even drive sales of loans. If anything, they apply the brakes after a loan officer has made the pitch and obtained a loan application from a prospective borrower.

Underwriters perform a distinct back-office role. They apply a multitude of factors to decide whether their employers should extend credit—after the application has been completed and the loan has been sold pending approval. We only have to look back about a decade to this country's housing credit crisis to appreciate the central importance to a lender of a high-functioning and discerning underwriting team.

Historically, Underwriters Have Been Found Exempt Under The Administrative Exemption

Particularly now, given the odor that still wafts from the bursting of the housing bubble, one would think the modern judiciary would readily view underwriters as primarily providing a centrally important variety of "office or non-manual work related to the management or general operations of the employer" lender—work that thus satisfies this requirement of the administrative exemption test.

And in 2015, consistent with this common-sensical assessment of underwriting, the Sixth Circuit in Lutz v. Huntington Bank concluded that mortgage underwriters were administrative exempt precisely because they "assist in the running and servicing of the Bank's business by making decisions about when [the Bank] should take on certain kinds of credit risk, something that is ancillary to the Bank's principal production of selling loans."

Ninth Circuit Denies Underwriters' Administrative Exemption

Earlier this month, the Ninth Circuit, in McKeen-Chaplin v. Provident Bank deviated from the Sixth Circuit's sound decision in Lutz. In assessing whether mortgage underwriters' work is "related to the management or general operations" of the bank, examined a judicially created "framework for understanding whether employees satisfy [this] requirement [called] the 'administrative-production dichotomy.'"

The dichotomy's purpose, Provident Bank explained, "is to distinguish between the goods and services which constitute the business' marketplace offerings" (so-called non-exempt production work), "and work which contributes to 'running the business itself'" (so-called exempt administrative work).

Provident Bank's Labored Discussion of The Administrative/Production Dichotomy And The Circuit Split. Provident Bank applied its strained view of administrative/production dichotomy by first observing that, "in the last decade, two of our sister Circuits have assessed whether mortgage underwriters qualify for the FLSA's administrative exemption and have come to opposite conclusions. The Second Circuit held in Davis v. J.P. Morgan Chase [in] 2009.. that 'the job of an underwriter... falls into the category of production rather than administrative work.' ... In contrast, the Sixth Circuit held recently that mortgage underwriters are exempt administrators, explaining that they 'perform work that services the Bank's business, something ancillary to [the Bank's] principal production activity'... . [W]e conclude the Second Circuit's analysis in Davis should apply."

Having voiced a preference for the Second Circuit's more restrictive application of the administrative/production dichotomy (which had, perhaps erroneously, assumed that underwriters were involved in the sale of mortgages), Provident Bank applied the dichotomy to hold that the mortgage underwriters were production workers, even while conceding a number of non-production components of mortgage underwriter work.

Provident Bank observed, for example, that mortgage underwriters "do review factual information and evaluate the loan product and information and ... assess liability in the form of risk," but then immediately dismissed this important role by concluding that the bank's promulgation of underwriter "guidelines that [the underwriters] do not formulate," somehow reduced the administrative quality of the work.

Provident Bank even went on to acknowledge the existence of significant differentiation between non-exempt "loan offers in the mortgage production process [and mortgage underwriters]—most significantly [the distinguishing fact that underwriters'] primary duty is not making sales on Provident's behalf."

A "Not So Distinct From Production" Standard? Despite these factual findings, the Provident Bank court still applied the administrative/production dichotomy to invalidate the bank's determination of exempt status. To accomplish this goal, Provident Bank articulated a "not so distinct from production" standard, explaining that the mortgage underwriters were still not administrative exempt because their duties "are not so distinct" from loan officers' role in the "mortgage production process" so "as to be lifted from the production side [of the dichotomy] to the ranks of administrators." The Ninth Circuit then ratcheted the standard up by explaining that "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" (emphasis added).

This "not so distinct from production" standard highlights the limitations of the administrative/production dichotomy and runs afoul of its intended purpose. For example, the Department of Labor's 2004 regulations, and case law, have made clear that this "dichotomy has always been illustrative – but not dispositive – of exempt status." The dichotomy "is only determinative if the work 'falls squarely' on the production side of the line."

Certainly, work that "is not so distinct" from the production side of the line is a far cry from work that "falls squarely" on the production side of the line. But a finding that work is not so distinct from production, though virtually meaningless, is all that Provident Bank seems to require.

The Administrative-Production Dichotomy Has Been Stretched Beyond Its Utility, Resulting In A Circuit Split And Confusion

Provident Bank's finding that underwriting work "is not so distinct from production" work has little to do with the test for administrative exemption or the Department of Labor's explanation of the limitations of the administrative/production dichotomy. Yet Provident Bank threatens to flip the dichotomy on its head, as it could be read to require an employer to show that that the work "falls squarely" off "the production side of the line" rather than establishing merely what the FLSA requires: that the employee performed office or non-manual work related to the management or general operations of the employer.

Sometimes, work such as underwriting does not obviously fall squarely on one side of the administrative/production dichotomy line or the other. That is why, for example, even the historically exemption-resistant California Supreme Court in Harris v. Superior Court (2011) observed "the limitations of the administrative/production worker dichotomy itself as an analytical tool" and thus reversed a decision that "improperly applied the administrative/production worker dichotomy as a dispositive test" with respect to insurance claims adjusters. Harris explained that since "the dichotomy suggests a distinction between the administration of a business on the one hand, and the 'production' end on the other, courts often strain to fit the operations of modern-day post-industrial service-oriented businesses into the analytical framework formulated in the industrial climate of the late 1940's'" when they should not force a strained application of the dichotomy, which is just an illustrative tool. Indeed, the Seventh Circuit of Appeals similarly reasoned in Roe-Midgett v. CC Services, Inc., (7th Cir. 2008) that the "typical example" of the dichotomy is a factory setting, an analogy that is "not terribly useful" in the service context.

Two Circuits have now built the administrative/production dichotomy into something larger than it was ever intended to be. The focus on the administrative/production dichotomy has overshadowed and confused focus on the actual rules and regulations intended to be assessed in considering the administrative exemption.

Provident Bank creates more questions than answers for employers seeking to classify their workforce, and calls out for Supreme Court review, or for Department of Labor clarification on how courts are supposed to apply the administrative-production dichotomy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions