Authored by Barry Miller

A recent onslaught of victories for Prospect Mortgage, LLC in Virginia provides valuable insight into the application of the FLSA’s outside sales exemption to workers who also perform significant portions of their jobs inside the office.  The company obtained a defense verdict in what appears to be the first trial in the nation on these issues.  Prospect also secured several rulings that cement a pragmatic standard for application of the outside sales exemption, requiring only that a sales employee leave the office for “one or two hours a day, one or two times a week” in order to qualify.  This ruling has significant ramifications for the mortgage lending industry and for all employers that maintain an exempt outside sales workforce.  (Note: In the spirit of full disclosure, Seyfarth represented Prospect Mortgage in these victories).

Facing the Jury

Prospect’s string of victories was punctuated by a jury trial verdict in its favor rendered on February 5.  An eight-member jury unanimously answered “Yes” to the question of whether Prospect had properly classified plaintiff Alison Cougill as an exempt outside sales person.

Cougill had survived summary judgment on the question of her exempt status, with Judge James C. Cacheris finding that her equivocal deposition testimony regarding the extent of her outside activities required a jury to decide the factual issues in the case.

The legal deck was stacked against Prospect at trial.  While the employer always bears the burden of proof regarding the FLSA’s exemptions, that burden is heavier in the Virginia federal courts, which are bound by law handed down from the Fourth Circuit Court of Appeals.  Instead of merely proving that Cougill was exempt by a preponderance of the evidence (i.e., more likely exempt than non-exempt), Prospect was required to prove that Cougill was an outside salesperson by “clear and convincing evidence.” 

The trial, however, was not close.  Plaintiff testified first, and her counsel then called Prospect’s chief human resources officer, a former regional manager for the company, and two Branch Managers who had supervised Cougill during her employment with the company.  Prospect limited its case to a pointed cross-examination of Cougill and a series of follow-up questions to the executives and managers whom Cougill’s counsel had subpoenaed.  The Company rested without calling any witnesses of its own.  After closing statements, the jury deliberated for about forty minutes before returning a verdict for Prospect that marked a complete victory.

The outside sales exemption is among the most straightforward of the FLSA’s exemptions.  It requires only that an employee is (1) primarily engaged in sales; and (2) customarily and regularly engaged in sales or promotional work outside of the employer’s places of business.  Because there was no dispute that loan officers like Cougill are engaged in sales, the only question for the jury was whether how often she was outside. 

Prospect focused on helping the jury understand its unique business model.  The witnesses explained that the Company’s sales strategy is founded in the recognition that the origination of mortgage loans is fundamentally a relationship business, and for that reason loan officers must develop a level of personal trust in order to successfully drive sales.  The best way to do that, the witnesses explained, was through ongoing, in-person contact with referral sources like local real estate agents.  With that framework established, Prospect leveraged Cougill’s positive performance record to show that she spent several hours each week on outside sales and promotional activities, including attending open houses, meetings sponsored by a local business networking group, one-on-one meetings with real estate agents, mortgage closings, and a host of other activities in the field. 

Prospect also relied on its communications to its loan officers emphasizing the Company’s expectation that they focus on outside activities in pursuing mortgage loan sales.  Prospect had memorialized these instructions in numerous sales initiatives and communications, as well as an Employee Agreement Regarding Outside Sales Activities, which each loan officer signed at the beginning of his or her employment with the company.

With this factual record in place, it took the jury longer to listen through Judge Cacheris’ final instructions than it did to reach a verdict that Prospect had proven by clear and convincing evidence that Cougill was properly exempt and not entitled to a minimum hourly wage or overtime pay. 

There have been dozens of lawsuits filed against mortgage lenders in recent years asserting FLSA claims on behalf of loan originators, and the position has also been the subject of scrutiny by the U.S. Department of Labor.  Notwithstanding this groundswell of litigation, the Cougill case represents one of very few – and perhaps the only – case to go to trial on the application of the outside sales exemption to mortgage loan officers in recent years.   

Twin Victories

Only hours after the jury rendered its verdict in the Cougill case, Prospect won another victory in Virginia, when Judge Cacheris entered summary judgment against loan officer Ronald Hantz.  Prospect based its motion on two arguments:  First, Hantz’s deposition testimony established that he was regularly engaged in outside sales.  Second, even if Hantz had not satisfied the exemption, he had failed to show that any violation of the FLSA was willful, which subjected him to a shorter statute of limitations that served to bar his claims.  

Hantz had attempted to invoke the FLSA’s extended, three-year statute of limitations for willful violations based on an argument that Prospect had not kept records of his working hours or individually examined the duties of each of its hundreds of mortgage loan officers to determine whether each one was exempt.  Judge Cacheris rejected both arguments, noting that Prospect’s belief that its loan officers were exempt was “perfectly reasonable.”  He noted that it was “only natural” that an employer operating under the belief that its employees were exempt would “decline to keep records that would only represent a pointless administrative burden.”  He also concluded that it was “unrealistic to suggest that an employer is obligated to conduct a review of the activities of each individual employee in order to rely on an exemption.”

Though he found that it was not strictly necessary to do so, Judge Cacheris went on to find that Hantz was, in fact, properly classified as an outside sales person.  The Court noted that Hantz’s supervisor expected him to be “out there knocking on doors” to sell loans, and that even though Hantz “also worked considerable hours inside the office,” the time that he spent outside “meeting with realtors and distributing fliers, attending open houses to network with potential customers, and giving seminars” reflected that those outside activities were critical to his sales efforts.

Hantz was the third loan officer to have his FLSA claims against Prospect extinguished by summary judgment in Virginia.  In the weeks leading up to the Cougill trial, the Company also secured summary judgment rulings against former loan officers Lora Hartman and Alice Dixon based on their own deposition testimony regarding their outside sales efforts.  In reaching these conclusions, the court rejected two legal arguments that the plaintiffs offered in an attempt to narrowly constrain the scope of the outside sales exemption.  First, Judge Cacheris rejected the plaintiffs’ contention that only interactions with customers that occurred at the customers’ homes or places of business were properly considered “outside”; he recognized that an interaction at a coffee shop or at an open house is also “outside” of the employer’s place of business for purposes of the exemption.  Second, the court rejected the notion that sales efforts resulting in transactions formally consummated inside of Prospect’s offices could not considered “outside.”  The court acknowledged that the sale of a mortgage loan is a multi-step process that may include a combination of inside and outside interactions, but those activities that a loan officer undertakes in the field are “outside” activities, irrespective of where the papers are eventually signed. 

An Obtainable Threshold for Exempt Status

In each of the cases noted above, the Virginia court applied a legal standard that includes a quantitative component that allows an employer to apply and defend with confidence.  In each of his summary judgment decisions, and in his instructions to the jury in Cougill, Judge Cacheris applied a standard that required that Prospect show only that a loan officer spends “one or two hours a day, one or two times a week” engaged in outside sales activity.  This standard naturally comes with recognition that an outside sales person may, in fact, spend a significant portion of his or her workweek in the office. 

The Virginia court also repeatedly observed that the standard that it applied for outside sales activity is consistent with the purposes underlying the exemption.  Citing to precedents from the early days of the FLSA, Judge Cacheris recognized that the purpose of the outside sales exemption is to accommodate a sales person who “to a great extent, works individually,” and who because he earns commissions on his sales “can earn as much or as little, within the range of his ability, as his ambition dictates.”  This pragmatic approach to the exemption has enabled Prospect to defend an employment practice that plays a key role in the Company’s business strategy. 

After an eventful tour on Virginia’s “rocket docket,” Prospect emerges from a series of FLSA cases in Virginia with a perfect scorecard.  The Company will doubtlessly benefit from the legal principles crystalized in Virginia in its continuing application of the outside sales exemption to its mortgage loan originators.  Other lenders around the country, and any other employer with a significant outside salesforce, will likewise reap the benefits of these rulings for years to come.