The United States Supreme Court has upheld an Administrator’s Opinion issued by the United States Department of Labor stating that “typical” mortgage-loan officers are not covered by the Administrative exemption to the FLSA’s overtime requirements.

The Supreme Court’s decision in Perez v. Mortg. Bankers Ass’n reversed a Circuit Court decision vacating the Opinion for failure to comply with the procedural requirements of the Administrative Procedure Act (“APA”).  Specifically, the Supreme Court ruled that the APA expressly exempts the Department of Labor (and other federal agencies) from the notice-and-comment rulemaking process when it makes changes to its own interpretive rules.

Rulemaking under the APA

The APA distinguishes between two types of rules.

The first type, “interpretive rules,” are issued to advise the public of the agency’s construction of the statutes and rules which it administers.  “Interpretive rules” do not require notice-and-comment rulemaking.

The second type, “legislative rules,” have the force and effect of law and are issued through notice-and-comment rulemaking.

The APA establishes a three-step procedure for “notice-and-comment rulemaking.” First, the agency must issue a notice of the proposed rule. Second, the agency must give “interested persons” the opportunity to submit written comments, and the agency must respond to those comments. Third, when the agency issues its final rule, it must include in the rule’s text a statement of the basis and purpose of the rule.

Applicability of the Administrative Exemption to Mortgage-Loan Officers

The dispute in Perez v. Mortg. Bankers Ass’n arose from a lengthy controversy over whether mortgage-loan officers are covered by the administrative exemption to the FLSA.

• In 1999 and 2001, the Wage and Hour Division of the DOL issued letters interpreting the FLSA and concluding that mortgage-loan officers did not qualify for the administrative exemption to the overtime pay requirements of the FLSA.

• In 2006, the Wage and Hour Division reversed its position and issued an opinion letter finding that mortgage-loan officers fell within the administrative exemption.

• In 2010, the DOL again changed its interpretation (without giving notice or an opportunity for comment), withdrew the 2006 opinion letter and issued an Administrator’s Interpretation stating that mortgage-loan officers do not qualify for the administrative exemption.

The Administrator’s Interpretation regarding Mortgage-loan Officers.

The 2010 Administrator’s Interpretation focused on whether the “typical” mortgage-loan officer was engaged in the administration of the employer’s business, or in the production of its products.

The Administrator cited to caselaw stating that the primary business purpose of mortgage-loan companies “is to design, create and sell home lending products.”

The Interpretation then stated that the primary duties of a mortgage-loan officer were making sales and related work “such as collecting financial information from customers, entering it into the computer program to determine what particular loan products might be available to that customer, and explaining the terms of the available options and the pros and cons of each option, so that a sale can be made…”  These activities constitute “the production work of an employer engaged in selling or brokering mortgage loan products.”

The Interpretation further stated that the duties of mortgage-loan officers “do not relate to the internal management or general business operations of the company” and thus do not qualify for the Administrative exemption.

The Administrator’s Interpretation noted that it applied only to employees who spend the majority of their time working inside their employer’s place of business and thus do not qualify for the Outside Sales exemption.

Notice-and-Comment Rulemaking is not required for Interpretive Rules

In July 2013, the D.C. Circuit vacated the Administrator’s Interpretation based on its prior decision inParalyzed Veterans of Am. v. D. C. Arena L.P.  That decision held that, if an agency wishes to issue a new interpretation of a regulation, and the new interpretation deviates significantly from the prior interpretation, the Agency must use the APA’s notice-and-comment procedures.

The Supreme Court found that by mandating notice-and-comment procedures when an agency changes its interpretation of one of the regulations it enforces, the Paralyzed Veterans doctrine was contrary to the rulemaking scheme established by Congress in the APA.

The judgment of the D.C. Circuit (vacating the Administrator’s Interpretation that mortgage-loan officers do not qualify for the administrative exemption) was therefore reversed.

Justices Alito, Scalia and Thomas Express Concern over Excessive Agency Power

Separate concurrences by Justices Alito, Scalia and Thomas raised concerns regarding the power vested in federal agencies by the APA and the Supreme Court’s decisions requiring deference to rules promulgated by federal agencies (beginning with its 1945 decision in Bowles v. Seminole Rock & Sand Co.).

Justice Scalia’s concurring opinion, for example, states that the Supreme Court’s has undermined the role of the courts by creating an “elaborate law of deference to agencies’ interpretations of statutes and regulations.”  In effect, the Supreme Court’s deference jurisprudence gives interpretive rules the same force of law as legislative rules, while omitting the procedural safeguards of notice-and-comment rulemaking.

Justice Thomas expressed similar concerns, and Justice Alito noted that he awaited a case in which the validity of the Seminole Rock doctrine could be explored through full briefing and argument.

The Impact of Perez v. MBA

The immediate effect of Perez is that courts must give deference to the Administrator’s Opinion that the “typical” mortgage-loan officer is not exempt from the overtime requirements of the FLSA and should be paid overtime compensation.  Companies employing those mortgage-loan officers should review the circumstances of their employment promptly to determine whether those individuals in fact are “typical” and should be classified as non-exempt.

Furthermore, in light of Perez, new administrative guidance interpreting the FLSA may be forthcoming.  The DOL has, for example, expressed significant concern over what it describes as the “fissured workplace” in which the role of the traditional employer is divided through “business models like subcontracting, temporary agencies, labor brokers, franchising, licensing and third-party management.”  Given these concerns, and in light of the NLRB’s recent position that McDonald’s  Corporation is a “joint employer” of the workers of its franchisees, interpretive guidance regarding the definition “employer” and “joint employer” would not be surprising.

Accordingly, employers should be prepared for the possibility of further administrative reinterpretations of the FLSA that are issued without any opportunity for notice and comment.