On July 5, 2017, the Ninth Circuit Court of Appeals dealt a blow to Provident Savings Bank, FSB (“Provident”) in a class action suit brought against Provident by mortgage underwriters who sued for overtime compensation under the Fair Labor Standards Act (“FLSA”), 29 U.S.C. § 201, et seq. The Ninth Circuit agreed with plaintiffs that they had been misclassified by Provident as exempt employees, reversed the decision of the United States District Court for the Eastern District of California granting summary judgment in the bank’s favor, and remanded the case with instructions to enter summary judgment in plaintiffs’ favor.
Plaintiffs in McKeen-Chaplin v. Provident Savings Bank, FSB, 862 F.3d 847 (9th Cir. 2017) were mortgage underwriters employed by Provident, to review and approve of mortgage loan applications. As those in the financial services industry know, it is the underwriter who verifies the information contained in mortgage loan applications, compares that information to the applicable guidelines for each loan product, and determines whether or not the applicants meet those guidelines. The underwriters do not, however, control how the loans are funded or what types of loans should be offered.
Non-exempt employees are entitled to overtime pay, but exempt employees are not. Provident classified its mortgage underwriters as exempt employees under the administrative employee exemption of the FLSA. An employee can be classified as exempt under the administrative exemption if: (1) the employee is compensated not less than $455 per week; (2) the employee’s primary duties involve office or non-manual work related to the management or general business operations of the employer or employer’s customers; and (3) the employee’s primary duties involve the “exercise of discretion and independent judgment with respect to matters of significance.” 29 C.F.R. § 541.200(a).
The Provident court split from the Sixth Circuit, which had held that mortgage underwriters do fall within the administrative exemption (Luz v. Huntington Bancshares, Inc., 815 F.3d 988, 995 (6th Cir. 2017)), and adopted the position held by the Second Circuit did in Davis v. J.P. Morgan Chase & Co., 587 F.3d 529 (2d Cir. 2009). The Davis court held that mortgage underwriters are non-exempt employees because the work they perform is more functional rather than conceptual, and the underwriters have no role in determining the future strategy or direction of the business. Agreeing with the Davis court, the Ninth Circuit acknowledged that while the mortgage underwriters could not be cast as assembly line workers, their duties were more related to the production side of the enterprise rather than the internal administration side. And as the McKeen-Chaplin court noted, administrative exemptions are construed narrowly against the employer. In essence, the Ninth Circuit took the position that the primary duties of mortgage underwriters did not involve the “exercise of discretion and independent judgment with respect to matters of significance.”
This case is yet another cautionary tale about the importance of correctly classifying employees. A misclassification can result in employers being liable for up to four years of back pay for overtime hours that the misclassified employees did not receive in compensation. The employer will also be liable for the misclassified employee’s missed meal and rest breaks, as well as for wage statement violations.
For more information regarding correctly classifying your employees, please contact Diane P. Craig at dpc@severson.com or 415-677-5530 or Rhonda L. Nelson at