Alexander Foxx, Associate Member, University of Cincinnati Law Review
The Department of Labor exempts an employee in a “bona fide administrative capacity” from overtime compensation.[1] An exempt employee (1) is paid more than $455 per week, (2) is in a management or business operations role, and (3) exercises discretion and independent judgment in the role. [2] Courts are split in their interpretations of requirements (2) and (3). The issue for the federal circuit courts is whether bank underwriters qualify for overtime exemption.[3]
Currently, the Ninth and Second Circuits support an interpretation of overtime rules that entitles underwriters to overtime.[4] The Sixth Circuit favors an interpretation that underwriters are not entitled to overtime. The Sixth Circuit’s view, while troubling public policy, is the legally proper view.
While the circuits do not extend their rulings beyond the underwriters, their holdings serve as a signal for how overtime of similar job positions—namely, office jobs with little corporate power, but considered administrative positions—may be evaluated. This could impact a large portion of the economy. For example, franchise managers could be impacted. Regardless of these considerations, I maintain that the Sixth Circuit’s view is the legally correct view and that underwriters are exempt from overtime.
The Sixth Circuit Approach
In Lutz v. Huntington Bancshares, Inc. the Sixth Circuit determined that underwriters were bona fide administrative employees and were exempt from overtime pay.[5] The court found the nature of the work that underwriters performed was critical to the overtime determination. A role that is fundamentally a management position will likely qualify for overtime exemption; a clerical or manual role, however, may entitle employees to overtime.[6] With this in mind, the Sixth Circuit opened its decision with a description of the underwriter position.[7]
The Sixth Circuit ruled the second prong of the overtime rule was fulfilled. The Court maintained that bank guidelines allow underwriters significant autonomy and that underwriters are bona fide administrative employees exempt from overtime under the second prong of the Department of Labor rule. The Court noted that underwriters use “judgement and experience” in granting loan modifications and interpreting loan applications objectively.[8] This view underpins the Court’s conclusion that underwriters “assist in the running and servicing of the Bank’s business by making decisions about when Huntington should take on certain kinds of credit risk,” fulfilling the second prong of the Department of Labor’s exemption requirement.[9] The Court differentiated the administrative nature of underwriters by distancing them from production-centered positions—positions which are typically overtime eligible.[10] The Court noted that the underwriters do not sell a product, but perform analyses similar to financial analysts, who are exempt from overtime compensation.[11] Given these factors, the Court concluded the second prong of the labor department rule was satisfied.
The Sixth Circuit then determined the third prong of the Department of Labor rule was satisfied because underwriters are permitted to exercise a large amount of judgment in their position. The Court observed that the bank guidelines imposed on underwriters allows for significant discretion in determining the approval of a loan application.[12] Given the discretion allowed by the guidelines, underwriters must “exercise independent judgment” in their position.[13]
The Sixth Circuit determined that underwriters were (1) administrative employees and (2) exercised professional judgment and discretion.[14] Therefore underwriters fulfilled the second and third prongs of the Department of Labor rule and exempted from overtime pay.
The Ninth and Second Circuits
In Davis v. J.P. Morgan Chase & Co. the Second Circuit differed from the Sixth Circuit, concluding that the second and third prongs were not satisfied because underwriters had little autonomy and managerial authority. The Second Circuit maintained that the guidelines promulgated by the bank provided a narrow route “in order to produce a yes or no decision” regarding the loan application.[15] This language indicated that the Second Circuit viewed bank guidelines as authoritative rules that bound the independent judgement of underwriters and subjected them to the production standards of the bank. The Second Circuit maintained that underwriter positions were not administrative positions, but production positions.[16] The Court noted that it is the primary duty of underwriters to “sell loan products under the detailed directions of the Credit Guide.”[17] Viewing underwriters as producers who (1) did not exercise independent judgement and (2) did not contribute to management decisions, the Second Circuit found that the overtime exemption requirements had not been met; neither the second or third prongs of the rule were fulfilled.[18]
The opinion of the Ninth Circuit in McKeen-Chaplin v. Provident Sav. Bank (the most recent of the three cases) closely paralleled the decision of the Second Circuit. The Ninth Circuit further expounded upon the difference between production and administrative roles. Administrative positions guide the “overall course or policies”[19] of the business, while production roles are concerned with the “day-to-day” operations of necessary business tasks.[20] Only administrative roles qualified for overtime exemption under the Department of Labor rule. In examining the nature of the underwriter position, the Ninth Circuit noted that underwriters are narrowly confined to the risk profile assigned to them by the bank and therefore are not administrators who exercise independent judgment.[21]
The Sixth Circuit Decision is Legally Proper, but Troubling Policy
The Sixth Circuit correctly classifies underwriters as overtime exempt employees. The position of underwriter is a role necessary to the management of bank business operations and therefore meets the second prong of the Department of Labor’s rule. Underwriters are instrumental to the revenues of lending institutions. Without underwriters, borrowers cannot be examined properly, and if borrowers cannot be examined properly, loans will likely default at a much higher rate. In short, underwriters make sure that loans are only given to people who will pay the loan back with interest. Given that underwriters are an essential part of the business operations of a bank, but do not work directly in a “production”[22] role[23] (this role falls to the loan originator)[24], it is a natural conclusion that they guide the business and operations of the bank. Opposition may argue that underwriters are a “production” role and thereby entitled to overtime under the McKeen decision—analogous to a factory line worker.[25] This view ignores the fact that underwriters do not produce loans—this task falls to the loan originator,[26] an individual who works in a different capacity (and usually a different office or city) than the underwriter. The position of underwriter is an administrative position that satisfies the second prong of the Department of Labor Rule.
The position of underwriter also completes the third prong of the Department of Labor’s rule. The third prong requires an exempt employee to demonstrate discretion or independent judgment in his or her role. Underwriters are evaluating the ability of individuals to pay back loans, which, at base, is a determination of an individual’s trustworthiness. An evaluation of trustworthiness cannot be undertaken without independent judgment. The opposition may argue that the guidelines provided to underwriters eliminate this judgment. This view ignores that underwriters are granted wide discretion within these policies and may be granted exceptions to these policies.[27] Underwriters therefore satisfy the third prong of the Department of Labor’s rule.
Despite the fact that underwriters do not seem to be eligible for overtime under the Department of Labor rule, the Sixth Circuit’s ruling raises troubling public policy questions. Namely, poor compensation of valuable employees should not be encouraged. If an employee is working over 40 hours per week in an “administrative” position, the employee is likely performing valuable tasks for the business. It would seem appropriate that such employees are compensated at a level that would make the potential benefits of litigation seem small. In short, it would seem prudent if the banks paid their underwriters more so the employees do not feel pressured to sue.
The Sixth Circuit seems to concur that underwriters are an important piece of the lending process and that they exercise professional judgment on a regular basis. As such, it is troubling that such valuable employees feel the need to bring suit against their employer for more compensation. Compensation in the labor market should be addressed by an efficient market—the supply of a certain skillset will demand equivalent compensation. Efficient markets seem to fail in the case of underwriters. Underwriters are clearly valuable and necessary employees that perform a task that is not automatable. However, given this litigation, underwriters feel as though their compensation is not adequate for their skillset. This may indicate a market that is out of equilibrium.[28] While legally proper, a legal decision that supports the under-payment of employees and an inefficient market is troubling.
If employees feel they are adequately compensated for their skillset they will not feel the need to bring suit against their employer for overtime compensation. If the underwriters had been paid a salary that they considered fair, they likely would not have felt the need to bring suit—the cost of litigation would not have been outweighed by the marginal pay increase. Employees that feel fairly treated and fairly may sue their employer less—a court decision is unnecessary to reach this conclusion.
Conclusion
The circuit split regarding overtime pay has no resolution on the horizon, especially given recent political developments.[29] It is troubling that the legal status of overtime pay—an instrumental compensation component of the labor market—is so fluid. A ruling from the Supreme Court would not be remiss.
While the split persists, the Sixth Circuit decision should be viewed as the legally proper conclusion. The Sixth Circuit correctly recognizes underwriters as instrumental business administrators who exercise substantial professional discretion. However, if companies endeavor to compensate employees at a market rate this may moot overtime litigation and the Department of Labor rule and create the desired market equilibrium.
[1] 29 C.F.R. § 541.200(a).
[2] See Lutz v. Huntington Bancshares, Inc., 815 F.3d 988, 992 (6th Cir. 2016) citing 29 C.F.R. § 541.200(a).
[3] Lutz at 990; Davis v. J.P. Morgan Chase & Co., 587 F.3d 529, 530 (2d Cir. 2009); McKeen-Chaplin v. Provident Sav. Bank, 862 F.3d 847, 849 (9th Cir. 2017)
[4] An underwriter is an employee of a lending institution that determines if a loan should be granted to a prospective borrower.
[5] Lutz at 990.
[6] 29 C.F.R. § 541.200(a).
[7] Lutz at 990-991. Underwriters receive loan applications from loan originators (for example, the branch banker that fills out a residential mortgage application with a customer). Upon receipt, underwriters evaluate the application for accuracy and determine if the loan will be approved. In determining loan approval, underwriters are subject to the guidelines of their bank. These guidelines outline lending procedures and risk profiles and, in large part, determine whether the underwriter can approve the loan.
[8] See id.
[9] Id at 990.
[10] Id.
[11] Id at 995.
[12] Id at 997.
[13] Id.
[14] Id at 998.
[15] Davis v. J.P. Morgan Chase & Co., 587 F.3d 529, 534 (2d Cir. 2009).
[16] Id. at 535.
[17] Id. at 534.
[18] Id. at 537.
[19] McKeen-Chaplin v. Provident Sav. Bank, 862 F.3d 847, 851 (9th Cir. 2017) citing Bothell v. Phase Metrics, Inc., 299 F.3d 1120, 1125 (9th Cir. 2002) quoting Bratt v. Cty. of L.A., 912 F.2d 1066, 1070 (9th Cir. 1990).
[20] Id.
[21] McKeen at 852.
[22] Production: “often attributive :something not specially designed or customized and usually mass-produced.” Production, Merriam-Webster Online Dictionary, https://www.merriam-webster.com/dictionary/production.
[23] Id.
[24] Lutz at 990.
[25] McKeen at 852.
[26] Lutz at 990.
[27] Lutz at 991.
[28] That labor markets may not always be in equilibrium is not a new hypothesis to economists. One explanation that is posited, and could apply here, is “sticky wages.” This means that wages to not adjust in sync with labor shortages and surpluses. See Sticky Wages, Renee Haltom, Federal Reserve Bank of Richmond, https://www.richmondfed.org/publications/research/econ_focus/2013/q1/q1, accessed September 26, 2017.
[29] Reuters, U.S. Judge Strikes Down Obama Administration Overtime Pay Rule, New York Times, https://www.nytimes.com/reuters/2017/08/31/us/31reuters-usa-overtime.html.
