Loan officer compensation is a controversial and difficult topic for mortgage lenders. Lenders face tough questions when classifying their loan officers as independent contractors or common-law employees.
‘It's all over the map in terms of how loan officers are treated,’ says Beverly W. Garofalo, a partner in the Hartford, Conn., office of Brown Raysman Millstein Felder & Steiner. ‘We have issues with a lot of contracts that are out there right now.’
For common-law employees, employers must withhold income taxes and pay Social Security and unemployment taxes, explained Garofalo, speaking at a session sponsored by the Connecticut Mortgage Bankers Association in Waterbury, Conn., last month. Lenders must comply with wage and hour statutes and discrimination and immigration laws, and provide workers' compensation insurance. Employers may also be held liable for their employees' actions.
But if their loan officers are independent contractors, lenders can pay only commissions and are not subject to minimum pay or overtime rules. Plus, the employers generally cannot be held vicariously liable.
While the benefits for using independent contractors are clear, the employees must meet specific tests to qualify for the category.
‘The consequences for misclassification could be staggering,’ Garofalo warns.
Companies could be forced to pay retroactive pay and benefits, as well as penalties for not paying unemployment and workers' compensation insurance. In a case filed against Microsoft, a court ruled that thousands of workers who had signed independent contractor agreements were common-law employees. The company had to pay retroactive benefits – including stock benefits, ‘which was staggering,’ she says.
There is no blanket rule saying loan officers are, or are not, independent contractors; every situation is case by case, according to Garofalo. The gist of classification: If you supervise workers, they could be employees.
‘If it walks like a duck’ is the bottom line, the attorney explains. ‘If they act like employees, they probably are. Whatever label you put on them is absolutely meaningless.’
When classifying employees, think of your plumber, she advises. You don't train him how to do his job or tell him how to do it. He decides when he arrives and uses his own tools. You only care if the pipe is fixed.
If using loan officers that are independent contractors, don't give them the company employee handbook, manage their performance or require them to work certain hours or attend company staff meetings, she urges. And don't give them formal performance reviews. If you don't like your plumber, you don't put them on probation, you just get another plumber.
Fair labor headaches
Meeting the Fair Labor Standards Act (FLSA) is another headache for mortgage lenders. That law requires them to pay employees time and a half for hours over 40 hours a week unless the workers fall under certain white-collar exemptions. Those categories include executive, administrative and professional employees, outside salespeople, computer professionals and highly compensated professionals (over $100,000 a year), a new group.
The act also requires companies to pay salaried employees a minimum of $455 a week. However, lenders can apply loan officers' commissions to the weekly minimum, she notes. The minimum amount must be paid ‘free and clear,’ regardless of the quantity and quality of work and without reallocating pay between weeks.
Only outside salespeople are exempt from the minimum salary. But to qualify for that category, the employees' primary duty must be making sales and they must be ‘customarily and regularly’ working away from the employer's place of business. Phone calls from any fixed location, including the worker's home, are considered employer's business location, according to Garofalo.
The National Association of Mortgage Brokers has asked the federal Department of Labor for an opinion stating if brokers fall under the outside sales exemption, she adds.
New regulations say employees in the financial services industry generally meet the administrative exception if they collect and analyze customers' financial information, and advise customers about the pros and cons of financial products. But loan officers must be acting as a financial advisor, using their judgment and adding value, not just offering the best rate at the time or following the company's flowchart, she cautions.
‘There are no blanket exemptions,’ she says. ‘You need to make sure your employees meet these exemptions.’
Penalties for violation are severe, including unpaid wages, double damages for willful violations and attorney's fees, she warns. And the statute of limitations is long – two years for nonwillful violations, three years for willful violations.
Mortgage firms are hard pressed to meet the rule and find how to exempt loan officers, who are often paid entirely on commissions. Although loan officer compensation has been a long-standing issue, a jump in class action lawsuits from hundreds, even thousands, of loan officers seeking minimum wage and overtime pay from large companies has exacerbated the problem, according to Garofalo.
‘Financial services is hot right now,’ she says. ‘Employees may get pennies on the dollar, and the attorneys will get millions because they always end up settling.’
Many lenders may assume their employees are exempt based on precedence, without analyzing the positions and making sure they fall under an exemption.
‘Many companies don't even think about it,’ Garofalo comments. ‘Unless they've thought it through and have really done the analysis, then they're opening themselves up to action.’