U.S. Department of Labor Attempts to Alter Overtime Requirements for Certain Financial Industry Employees Through Novel Use of “Administrator’s Interpretation,” Rather Than Through Ordinary Rulemaking or An Opinion Letter

March 29, 2010

Last week, the U.S. Department of Labor’s Wage and Hour Division announced a new procedure for interpreting the provisions of the Fair Labor Standards Act ("FLSA"), 29 U.S.C. § 201 et seq.  Instead of issuing "opinion letters"–Division explanations of how the FLSA applies under a specific set of factual circumstances–or promulgating regulations, the Division will now apparently issue "Administrator’s Interpretations" that purport to set forth a general interpretation of a particular statutory or regulatory provision.  In its first Administrator’s Interpretation, the Division withdrew previous guidance regarding the exempt status of mortgage loan officers, attempted to limit the reach of a regulation of some significance to the financial services industry generally, and stated that a "typical" mortgage loan officer would not qualify for exempt status under the FLSA.  The Division’s announcement–both the general change to using Administrator’s Interpretations and the particular interpretation regarding mortgage loan officers–represents a noteworthy development that may be of concern to the financial services industry and employers generally.

"Administrator’s Interpretations" are a departure from the Division’s longstanding methods of providing FLSA guidance:  rulemakings and opinion letters.  The Division has promulgated a number of regulations interpreting the FLSA through notice-and-comment rulemaking, allowing the public to view the proposed rules and suggest modifications to them.  See, e.g., 29 C.F.R. § 541 (defining the exemptions for executive, administrative, professional, computer and outside sales employees).  The Division has also traditionally responded to a specific request regarding a certain set of factual circumstances by issuing an opinion letter, which analyzed how the statute, regulations, caselaw, and previous opinion letters applied to the facts presented. 

The Division’s new approach purports to adopt a broader and more generally applicable interpretation of the FLSA than found in an opinion letter, but without the notice-and-comment procedures of traditional rulemaking.  See Administrative Procedure Act ("APA"), 5 U.S.C. § 553.  The Division evidently intends, as here, to issue an Administrator’s Interpretation sua sponte without a specific request and to apply its interpretation–based upon hypothetical facts that the Division considers "typical"–to an entire industry or class of employees.

The use of Administrator’s Interpretations could be intended to facilitate a more proactive approach in determining the scope of the FLSA and its exemptions, again without adhering to the notice-and-comment safeguards of the APA.  It raises a number of questions of broader significance as a matter of administrative law, such as what level of deference courts should give to these Administrator’s Interpretations.  Such Interpretations should not be entitled to Chevron-level deference, as they are not issued pursuant to a notice-and-comment process nor do they bear other indicia warranting Chevron deference.  See Christensen v. Harris County, 529 U.S. 576 (2000) (opinion letters do not receive Chevron deference); United States v. Mead Corp., 533 U.S. 218 (2001).  The Division may argue that Administrator’s Interpretations merit significant deference because they are the agency’s interpretation of its own regulations, but courts have sometimes been reluctant to defer to opinion letters on that ground.  See, e.g., Christensen, 529 U.S. 576; Sehie v. City of Aurora, 432 F.3d 749 (7th Cir. 2005); but see In re Farmers Ins. Exch., 481 F.3d 1119 (9th Cir. 2007).  Courts may end up affording Administrator’s Interpretations Skidmore deference, that is, deference that depends on the "power" of the particular Administrator’s Interpretation "to persuade."  Skidmore v. Swift & Co., 323 U.S. 134 (1944).

Substantively, this first Administrator’s Interpretation may signal an effort by the new Administration to narrow exemptions from the FLSA’s overtime requirements, particularly with respect to the financial services industry.  In 2004, the Department issued long-awaited revisions to the FLSA regulations, focusing in particular on clarifying the scope of exemptions that apply to white-collar workers.  Those regulations specifically state that employees in the financial services industry who analyze customer information, advise customers about financial products, and market and promote financial products should generally qualify for the FLSA’s exemption for administrative employees.  29 C.F.R. § 541.203(b).  The regulations also brought much-needed clarity to the financial services industry regarding the scope of the FLSA and its many requirements.

In the Administrator’s Interpretation, however, the Division concluded that employees who perform the "typical" duties of a mortgage loan officer do not qualify for the exemption.  It first described what it considered to be the typical duties of a mortgage loan officer and then considered whether the employee’s primary duty was 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.

The Administrator’s Interpretation concluded that mortgage loan officers’ primary duty was sales and that sales were not directly related to the management or general business operations of the employer or the employer’s customers, withdrawing a 2006 opinion letter that had reached the opposite conclusion.  As part of its analysis, the Administrator’s Interpretation relied heavily on an outmoded distinction between "administrative" work and "production" work, the original purpose of which was to distinguish between assembly-line workers at a production facility and the office employees who handled the paperwork and other support functions for the facility.  That distinction, however, was diminished significantly in the 2004 revisions to the regulations and has been de-emphasized in more recent judicial decisions.  See, e.g., In re Farmers Ins. Exch., 481 F.3d 1119 (9th Cir. 2007); Roe-Midgett v. CC Servs., 512 F.3d 865 (7th Cir. 2008); Kohl v. Woodlands Fire Dep’t, 440 F. Supp. 2d 626 (S.D. Tex. 2006).

The current regulation states that "[t]o meet this requirement [of the administrative exemption], 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."  29 C.F.R. § 541.201(a) (emphasis added).  This definition retains the instructive contrast with non-exempt employees who manufacture a good, but is now clearly an example, not an overarching test.  And, by making the reference to "production" explicitly a reference to a specific job (rather than a potentially broad conceptual reference to production), it was designed to provide a firewall against more expansive readings under which, for example, all of a company’s sales and marketing, or financial-advisory, staff could be considered "production workers" on the theory that the company’s business is to "produce" "sales" or financial advice.  See Reich v. John Alden Life Ins. Co., 126 F.3d 1 (1st Cir. 1997) (sales plus marketing and promotion exempt under administrative exemption); Hogan v. Allstate Ins. Co., 361 F.3d 621 (11th Cir. 2004) (sales plus servicing customers, promoting sales, and advising customers exempt under administrative exemption); see also Schmidt v. Eagle Waste & Recycling, Inc., 598 F. Supp. 2d 928 (W.D. Wis. 2009).  As the Department explained in the preamble to the final rule, it "d[id] not believe that it [wa]s appropriate to eliminate the concept entirely from the administrative exemption, but neither [did it] believe that the dichotomy ha[d] ever been or should be a dispositive test for exemption."  "[T]he distinction should only be employed as a tool toward answering the ultimate question, whether work is ‘directly related to management policies or general business operations,’ not as an end in itself."  69 Fed. Reg. 22,141.

The Administrator’s Interpretation also relies significantly on a pre-2004 case, Martin v. Cooper Electric Supply Co., 940 F.2d 896 (3d Cir. 1991), that applied the administrative/production dichotomy to significantly limit the administrative exemption.  The invocation of Cooper suggests that the Division is seeking to reinvigorate the dichotomy and retract this important change in the 2004 regulations. 

The Department’s treatment of language in the 2004 regulations regarding the financial services industry is also notable.  A 2006 opinion letter had given the regulatory language at 29 C.F.R. § 541.203(b) weight in concluding that loan officers were exempt administrative employees.  The Administrator’s Interpretation withdrew that 2006 opinion letter and criticized its reliance on the regulatory language, dismissing the regulation as "merely provid[ing] an example" and not "creat[ing] an alternative standard for the administrative exemption for employees in the financial services industry."

Employers in the financial services sector may contend that the Administrator’s Interpretation constitutes an attempt to amend the regulation without following notice-and-comment rulemaking procedures.  They may also contend that basing an Interpretation on a supposedly "typical" employee conflicts with recent decisions of several courts that have concluded that whether a loan officer satisfies a particular FLSA exemption necessitates an individualized, fact-specific inquiry.  See, e.g., Trinh v. JP Morgan Chase & Co., 2008 WL 1860161 (S.D. Cal. April 22, 2008); Olivo v. GMAC Mortgage Corp., 374 F.Supp.2d 545 (E.D. Mich. 2004); see also Colson v. Avnet, Inc., 2010 WL 339047 (D. Ariz. Jan. 27, 2010) (citing, inter alia, In re Wells Fargo Home Mortgage Overtime Pay Litig., 571 F.3d 953 (9th Cir. 2009); Vinole v. Countrywide Home Loans, Inc., 571 F.3d 935 (9th Cir. 2009)).

The Division’s use of "Administrator’s Interpretations" marks a significant watershed, both procedurally and substantively, in the Division’s approach to wage-and-hour issues.  It also raises numerous questions of administrative law and regarding the scope of the FLSA "white collar" exemptions, particularly those affecting the financial services industry. 

Gibson, Dunn & Crutcher LLP
 

Gibson, Dunn & Crutcher’s Labor and Employment Practice Group and its Administrative Law and Regulatory Practice Group have extensive experience reviewing and challenging regulatory actions, and counseling and litigation regarding the Fair Labor Standards Act.  Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these issues.  Please contact the Gibson Dunn attorney with whom you work, or any of the following attorneys:

Eugene Scalia – Practice Co-Chair, Washington, D.C. (202-955-8206, [email protected])
William D. Claster – Practice Co-Chair, Orange County (949-451-3804, [email protected])
William J. Kilberg P.C. – Washington, D.C. (202-955-8573, [email protected])
Julian W. Poon – Los Angeles (213-229-7758, [email protected])

© 2010 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.