December 01, 2017

Are Underwriters Exempt From Overtime Requirements? Supreme Court Leaves Question Open

Are underwriters exempt from the Fair Labor Standards Act’s (FLSA) overtime requirements? Financial services companies may assume so. But a recent Ninth Circuit decision—along with the Supreme Court’s refusal on November 27 to hear the case and resolve a developing circuit split—casts doubt on this assumption.

When May an Employee Be Classified as Exempt?

Certain categories of employees are exempt from the FLSA’s overtime requirements, including those “employed in a bona fide executive, administrative, or professional capacity.” Employers have historically argued underwriters are exempt administrative employees under the following three-prong test:

  1. Paid at least $455 per week on a salary or fee basis,
  2. Primary duty is 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, and
  3. Primary duty includes the exercise of discretion and independent judgment with respect to matters of significance

The second prong turns on the “administrative-production dichotomy,” which distinguishes between work performed in furtherance of “the running or servicing of the business” (exempt), from that of “working on a manufacturing production line or selling a product in a retail or service establishment” (not exempt).

The third prong tests the employee’s autonomy and ability to exercise independent judgment “free from immediate direction or supervision” and concerning “matters of significance.”   

Ninth Circuit Rules Underwriters Are not Exempt

In the recent case of McKeen-Chaplin v. Provident Savings Bank, FSB, 862 F.3d 847 (9th Cir. 2017), the Ninth Circuit held underwriters are not administrative employees. The Ninth Circuit distinguished underwriters from insurance claims adjusters and financial services professionals, who generally are considered exempt by the Department of Labor, observing that the responsibilities of such employees are more integral to their employers’ business operations than those of an underwriter. The Court’s ruling also relied on evidence that the employees could not deviate from established underwriting guidelines to conclude the duties of an underwriter do not involve the exercise of discretion.

Ninth Circuit’s Ruling Departs From Approach Taken in Other Jurisdictions

The McKeen-Chaplin decision represents a deepening of the split of authority on this issue. Just last year, the Sixth Circuit held mortgage loan underwriters are exempt in Lutz v. Huntington Bancshares, Inc., 815 F.3d 988 (6th Cir. 2016).

In stark contrast to McKeen-Chaplin, the Sixth Circuit analogized the role of underwriters to claims adjusters and financial services employees, observing that both underwriters and claims adjusters perform work that is necessary to the operation of the company and perform a vital investigative function. And, like exempt financial services employees, underwriters must exercise independent judgment when evaluating the applicant’s financial status and qualifications. Similarly, despite the requirement that underwriters adhere to written guidelines, the Court held underwriters exercise discretion over matters of importance.

At least one federal district court has applied the Sixth Circuit’s reasoning to conclude insurance underwriters are exempt, demonstrating that the reach of the McKeen-Chaplin and Lutz decisions extends beyond mortgage loan underwriters.

Supreme Court Declines to Weigh In

Following the Ninth Circuit’s ruling that underwriters do not qualify under the administrative exemption, the employer petitioned the Supreme Court to review the case. However, in its ruling handed down on Monday November 27, the Court declined to do so, thereby allowing the Ninth Circuit’s decision to stand.

What This Means for Financial Services Employers

The fractured approach taken by various federal circuits has created uncertainty over the proper classification of underwriters. Since the Supreme Court passed on the opportunity to guide financial services companies and resolve the split among appellate courts, the financial services industry should exercise caution and be prepared to defend any classification of underwriters as exempt.

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