Since the beginning of theyear, three major players in the financial services industry haveannounced multi-million-dollar settlements in wage-hour lawsuits.

•On Feb. 9, UBS announced that it would pay up to $89 million to resolvemultiple lawsuits based on claims of failure to pay overtime andalleged improper wage deductions to retail brokers, financialconsultants, and trainees.

• On March 3, Morgan Stanleyannounced that it would pay up to $42.5 million to settle a Californiasuit brought on behalf of about 5,000 financial advisers.

• OnMay 24, Smith Barney, a division of Citigroup Global Markets, Inc., inthe largest settlement yet, announced it is paying $98 million to apotential class of over 20,000 brokers in California, N.Y., and N.J.

• Merrill Lynch settled an action last year with an agreement to pay $37 million dollars.

And class-actions remain pending against nearly all major retail securities firms for alleged wage-hour violations.

Why is this happening, and what could it mean to your bank?

Depression law, modern workplace
Thecases all involve a 70-year-old law passed to prevent the exploitationof low-paid workers in sweatshops and through abusive pieceworkpractices during the Depression. The Fair Labor Standards Act (FLSA)requires the payment of overtime pay—“time and a half” the regularhourly wage—for all hours worked in excess of 40 a week. When the FLSAwas enacted in 1936, Congress recognized exemptions to the overtime payrule, several of which are known collectively as the “white collar”exemption. Banks have traditionally relied on the white collarexemption to avoid paying overtime to bank officers who fill a widevariety of positions, including loan officers.

The workplace haschanged dramatically since 1936. There has been a shift from amanufacturing to a service economy; computers have not only automatedmany time-intensive positions, but have also led to the development ofwhole new families of jobs. Yet the regulations defining the whitecollar exemption remained virtually unchanged until August 2004, whenlong-awaited reforms were announced.

The cases described abovewere all in the pipeline before the new regulations took effect.However, in the end the “reforms” changed so little that it is doubtfulthat the outcome of pending and future cases will be affected much.

The white-collar exemption covers executive, administrative, and professional workers, and comprises two tests:

1. Is the worker paid at least $455 a week “on a salary basis”?
2. Does the “primary duty” of the worker fit within the definition set out in the applicable regulation?

Inthe Smith Barney, UBS, Morgan Stanley, and Merrill Lynch cases, theemployer failed the “salary basis” test. These financial advisors andtrainees were paid only on an incentive basis. They were not paid afixed sum on a weekly, bi-weekly, or monthly basis.

Redesigning for compliance
Indetermining status under FLSA and the regulations, actual job titlemeans little. Financial advisors and consultants with broker-dealersmay perform similar duties to loan officers with banks: they advisecustomers on a range of financial products. Therefore banks that arepaying their loan officers only commissions, but are still exemptingthem from overtime, are likely to be violating the FLSA, and may be atarget for a class-action suit.

Converting compensation fromcommissions-only to a salary basis is tricky. A balance must be struckbetween incurring additional payroll expense to the bank andundermining worker moral by reducing take-home pay. The best solutionmay be to establish a “guaranteed draw” that equates to at least $455 aweek, then pay commissions only to the extent that they exceed thedraw. If the draw is paid on a monthly basis, rather than weekly orbi-weekly, the likelihood of the draw exceeding commissions actuallyearned is reduced, as more deals will close during the longer period.

Ofcourse, there are many other compensation plans that either meet thesalary basis test or minimize overtime pay exposure, but they arebeyond this article.

Duties are key, not title
However,the solution is not as simple as merely converting loan officers from acommissions-only compensation scheme to all salary, however, or givingthem a base salary, with incentive compensation on top. There is thatother test that must be met: the “primary duty.”

Taking each of the three white-collar exemptions in turn, let’s examine the primary duty requirement.

Thereis no need to spend much time on the professional exemption’s primaryduty test. “Professional” means advanced knowledge in a field ofscience or learning, customarily acquired through a prolonged course ofspecialized intellectual instruction (like a Ph.D.) Although theprimary duty again includes the exercise of discretion and independentjudgment, its focus is intellectual, rather than commercial, and israrely if ever applicable to bank positions.

To meet theexecutive exemption, the employee’s primary duty must be the“management of the enterprise, or a recognized department orsubdivision” of it. He or she must also “customarily and regularlydirect” the work of two or more employees, and also have the authorityto hire and fire, or make recommendations on hiring and firing that aregiven “particular weight.”

Thus, a “Vice-President, CommercialLending,” who has several other lenders and loan processors reportingto him or her, will meet this test. Remember, the title“vice-president” means nothing on its own: it is the actual dutiesperformed by the incumbent that are the key to the exemption.

Theadministrative exemption is the one most often relied on in seekingovertime exemption for lenders. Here, the primary duty is performanceof non-manual office work related to business operations. The employeemust exercise discretion and independent judgment regarding “matters ofsignificance.”

In commentary on the 2005 reforms, the U.S.Department of Labor specifically addressed when the administrativeexemption applies in the financial services industry. Employees in thefinancial services industry “generally meet the duties requirements ofthe administrative exemption if their duties include work such ascollecting and analyzing information regarding the customer’s income,assets, investments, or debts; determining which financial productsbest meet the customer’s needs and financial circumstances; advisingthe customer regarding the advantages and disadvantages of differentfinancial products; and marketing, servicing, or promoting theemployer’s financial products.”

In an Opinion Letter released atthe end of September 2006, the Department of Labor applied thislanguage about the financial services industry generally to mortgageloan officers in particular. The department found that these mortgageloan officers’ primary duty was not sales.

Their work included“collecting and analyzing a customer’s financial information, advisinga customer about risks and benefits of various mortgage loanalternatives in light of their individual financial circumstances, andadvising the customer about avenues to obtain a more advantageous loanprogram.” As such, they satisfied the primary duty requirement of theadministrative exemption: “the performance of office or non-manual workdirectly related to management of general business operations.” TheLabor Department also opined that the mortgage loan officers wereexercising discretion and independent judgment with regard to mattersof significance, even though they relied on software programs whichdisplayed the various and frequently changing products, theirqualification requirements, terms, and prices.

Although thisOpinion is based exclusively on facts presented to the department, itdoes encourage us to think that the administrative exemption mightapply to different kinds of lenders, for example, commercial lenders,where they have a wide leeway in the kind of financial solutions theysuggest to customers. Probably consumer lenders, who are more rigidlyconfined by credit policies established higher up the chain, may notqualify for the exemption. It appears the financial advisors who suedUBS et al. may have met the administrative exemption’s primary dutyrequirement because they exercised discretion and independent judgmentin guiding their clients through a maze of alternative investmentopportunities. However, their employers flunked the salary basis test.

Insummary, banks that want to avoid paying lenders overtime and alsoavoid the risk of substantial wage-hour liability, but that still wantto incent greater loan production, should give employees the discretionto advise customers on a range of financial products, and structure acommission or bonus scheme in addition to the base salary or guarantee.

A possible alternative
But there is another solution.The FLSA provides an overtime exemption that does not require thesalary payment or guarantee, the supervision of other employees, or theexercise of discretion and independent judgment: This is the “outsidesales” exemption. This exemption will only be available for employeeswhose primary duties involve “making sales, or obtaining orders orcontracts for services” and who are “customarily and regularly engagedaway from” the bank.

Another recent Opinion Letter from theU.S. Department of Labor confirmed the availability of the outsidesales exemption for mortgage loan originators (as distinct from themortgage loan officers described above) who sold mortgage loan packagesto clients they originated themselves through cold calls or bydeveloping and maintaining referral sources. (To read the DOL OpinionLetters, go to the FLSA Compliance Library at www.helmsgreene.com).

Theloan originators in this case typically met with clients at theclient’s home or other locations away from the bank or the lender’shome office. Any contact with the client by phone, mail, or e-mail wasadjunct to these in-person contacts. They also made in-person calls onreal estate agents and other potential referral sources. They hadconsiderable flexibility in scheduling the tasks they performed, whichalso included obtaining credit information and other necessarydocumentation, and marketing activities in support of their own sales.In these circumstances, the Labor Department found that the mortgageoriginators were “customarily and regularly engaged away from theemployer’s place of business” when performing their “primary duty” ofselling mortgage loan packages. Note that the lender’s office inhis/her own home was included as “the employer’s place of business” inthis Labor opinion.

Not all lenders will meet the “customarilyand regularly engaged away from the employer’s place of business” test,but for some, the outside sales exemption will enable the bank tocontinue “commission only” compensation arrangements, and to avoidovertime payments for hours worked in excess of forty a week.

Review job descriptions for fit
Wageand hour class actions have replaced discrimination lawsuits asplaintiffs’ lawyers’ favorite vehicle for extracting large dollarsettlements from employers.

When times are good, employeeshave no problem with working long hours on generous commissionschedules. However, a single disgruntled employee could instigate alawsuit with catastrophic results for the bank, if it is found that thewhite collar exemption does not apply. All employees in the same jobcategory would be entitled to time and one-half their regular rates ofpay for work in excess of 40 hours per workweek for the previous two,perhaps three, years.

For individuals earning substantialsums, the overtime liability can also be very substantial. Becauseemployers are required to maintain accurate records of all hours workedby non-exempt workers, the lack of any time records will not providerelief for the bank. On the contrary, employee memory regarding hoursworked (which may be “enhanced” by time and prospect of recovery) willgenerally be taken as the measure for back pay.

A careful auditof the exempt/non-exempt classification of bank officers, especiallyloan officers, might turn up some troubling areas of potentialwage-hour liability. Making the required changes may be painful.However, ignoring this possible exposure is not a sensible course. BJ

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