Overtime for Commissioned Employees in the Financial Industry

By Michael L. Fortney

Contents


Overview of Overtime for Commissioned Financial Industry Employees

The financial services industry, and the home mortgage industry in particular, tends to pay employees by commission. This is particularly true for sales type positions, such as home mortgage loan officers. Although federal regulations allow employers to exempt financial service industry workers from overtime, financial service employers must pay the white collar workers a guaranteed salary of $455 per week. As a result, Employers who pay only commissions and do not guarantee a salary must pay loan officers and similar employees for overtime. This article answers frequently asked questions on this topic.

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Are commissioned mortgage loan officers entitled to overtime pay?

Yes, but with an exception. The general rule is that employers must pay employees for overtime hours, unless the employee is “exempt” from overtime. The United States Department of Labor (“DOL”), which regulates overtime compensation allows an exemption for loan officers, but only if the employer pays the loan officer a salary of $455.00 or more each week.

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Are there Other Exemptions that Apply to Mortgage Employees?

The Fair Labor Standards Act (FLSA), the law that requires overtime pay, has quite a few exemptions. The ones that matter most to a discussion about mortgage industry employees are the administrative, executive and retail or service industry commissioned sales exemptions.

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Do loan officers fall under the administrative exemption?

Of the three exemptions, the administrative exemption is the most likely to apply to loan officers.

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Does this meant that loan officers are not entitled to overtime?

Not exactly. The new rules say that loan officers can be exempt from overtime, but only if the employer pays them, on a salary basis, at least $455.00 each week.

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What does it mean to be “paid on a salary basis?”

An employee is paid “on a salary basis” if he or she regularly receives each pay period a predetermined amount constituting all or part of his compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work her performed. The clearest example is a guaranteed salary of, say, $500.00 per week.

The salary may be all or part of the employee's compensation. In other words, additional compensation besides the salary, such as commissions on top of a salary, is still pay “on a salary basis,” so long as the employee receives at least the minimum salary every pay period. An example of this type of compensation arrangement is an arrangement that pays the guaranteed salary or commission earnings for that pay period, whichever is greater. So long as the employer pays the salary in the weeks in which the employee earns less than $455 in commissions, the employer has paid the loan officer on a salary basis.

The key, however, is that the employer must agree beforehand to pay the minimum salary of $455 per week. Thus, if an employee earning pure commissions always earns more than $455.00 per week, but her pay is tied solely to production, she is probably not paid on a salary basis. This employee’s case becomes clearer if she receives less than $455.00 per week during a pay period because he did not earn enough commission income for that pay period.

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Can financial industry employees be exempt as “executives”

In some cases, yes. Branch managers, for example, may be exempt from overtime, so long as they perform "executive" duties and are also paid on a salary basis.

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What are executive duties?

An employee performs executive duties if:

  • Her primary duty is managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
  • She customarily and regularly directs the work of at least two or more other full-time employees or their equivalent; and
  • She has the authority to hire or fire other employees, or her suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees is given particular weight.

However, just like administrative employees, the executive exemption only applies if the employee is paid on a salary basis. The salary basis test is the same for executive and administrative employees.

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Does the retail or service establishment commission sales exemption apply to commission loan officers?

In 1959 the United States Supreme Court expressly held that enterprises in the financial field, such as banks, credit companies and personal loan companies, do not qualify as a “retail or service establishment” within the meaning of this exemption. Although Congress amended this exemption since then, it made clear that it did not intend the exemption to apply to financial service companies. Likewise, the DOL has long interpreted this exemption as not covering financial service firms. 

Importantly, the DOL could have, but did not, change this exemption when it changed other exemptions. Thus, while it chose to broaden the administrative exemption to apply to loan officers paid $455 or more per week on a salary basis, it did not expand the definition of “retail or service establishment” to include financial firms. As a result, it is unlikely that the DOL or a court will apply this exemption to a loan officer working for a traditional mortgage company today, at least until Congress or the DOL changes this exemption.

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If my employees earn only commissions, how do I calculate their overtime pay?

If financial services employees only earns commissions, without any guaranteed salary, they are probably entitled to overtime. Their overtime rate, which is called the “regular rate,” is the total amount that they earn during a work week divided by the total number of hours that they worked. Thus, if a commissioned employee earns $750 each week for two weeks but worked 55 hours the first week and 59 hours the second week, his or her regular rate is $750 divided by 55 hours, or $13.64 for the first week, and $750 divided by 59 hours, or $12.71, the second week.

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If the regular rate from commissions is $13.00, do I have to pay $19.50 for each overtime hour?

Not exactly, but I can see how you got there, since the general rule is that an employer must pay 1.5 times the regular rate of pay for every hour of overtime worked. However, since the regular rate of pay is based on the total hours that the employees work, including their overtime hours, it treats them as receiving the regular rate for the overtime hours to begin with. In other words, the $13.00 assumed as the regular rate is for all hours, including those over 40.  Thus, the overtime amount is actually the “.5" part of the “1.5" times equation.

To complete this example, an employee who works 55 hours and earns $715 will have a regular rate of $13.00 per hour for all 55 hours.  His or her overtime is 1/2 of $13.00 ($6.50) multiplied by 15, the number of overtime overtime hours, for a total of $97.50.

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If I did not pay overtime, how much could a court conclude I would owe?

How much you owe in unpaid overtime depends on three factors:

  • The number of overtime hours that your employees worked in each pay period;
  • The amount they earned in each pay period; and
  • Whether your s failure to pay overtime was "willful" or not.

If you correctly paid all overtime when it was earned, you would pay the overtime as calculated in the above example.  If your employee obtains a court order requiring you to pay overtime, the court will probably order you to pay the employees' reasonable attorneys' fees as well.

If did not pay the overtime owed because you had a reasonable, good faith believe that you did not owe it, then you would owe unpaid overtime only from the last two years. An employer has the burden of proving a reasonable, good faith belief that an employee was exempt, which is difficult to prove. If, however, you had no good faith basis for failing to pay you overtime, then the court will likely double the amount as “liquidated damages.” 

If you cannot prove a reasonable, good faith belief and the employee can prove a "willful" violation of the FLSA, then the employee can recover unpaid overtime for three years, plus an equal amount in liquidated damages.

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