Overtime pay for advisers?

Obama's proposal reignites a debate in the industry over who should be compensated for extra hours

Mar 14, 2014 @ 12:01 am

By Mason Braswell

Overtime, practice management, staff compensation, registered representatives, advisers
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President Barack Obama's reported proposal to require more businesses to pay their employees overtime has highlighted the grey area around what positions in the advice business should be for paid hours worked outside the traditional work week.

Although his plan, which was reported on Wednesday by The New York Times, hasn't been fully unveiled, many said that any effort to expand overtime could add to confusion in an industry that has struggled with how to classify certain workers, such as trainees, client associates and even financial advisers themselves.

“If there's a problem where people should be getting overtime pay and they're not, then maybe we should be looking closer at the rules that are already in place,” said Debra Girvin, president of Lochlyn Company, a human resources consulting firm. “We need to bring that in order, and then if we still think something's wrong, then change the rules to broaden the scope.”

News of the president's proposal arrives as a number of large firms, including JPMorgan Chase & Co. and Bank of America Merrill Lynch, continue to face class actions and multimillion-dollar settlements in cases where they were accused of misclassifying stockbrokers and advisers.

Most stockbrokers and advisers are presumed to be exempt under the administrative exemption in the Fair Labor Standards Act, according to Mary Dunlap, founder of an eponymous consulting firm that works with several independent advisory firms.

But some advisers have had success arguing against the administrative exemption, which states that the primary work of an exempt individual “includes the exercise of discretion and independent judgment with respect to matters of significance.”

“That's where it gets muddy,” Ms. Dunlap said. “Because if you only have discretion over little things, then you don't have that much decision-making authority.”

There are questions as to whether that exemption applies to advisers, especially brokers who receive commissions for selling investment products, according to Jennifer Liu, an attorney with Outten & Golden, which is representing a group of bank advisers who filed class action claims against JPMorgan Chase.

Her firm has made the argument in the JPMorgan case and others, including one filed against Bank of America Merrill Lynch on behalf of bank advisers, that making sales doesn't qualify as exercising discretion. Those cases are pending.

“Financial adviser is a category that has been debated,” Ms. Liu said. “It really depends on the primary duty, and is the primary duty advising or sales?”

The Labor Department intends for the administrative exemption to apply generally to financial services professionals if their duties include analyzing customers' assets and counseling on the advantages and disadvantages of certain products, according to the Fair Labor Standards Act.

“However, an employee whose primary duty is selling financial products does not qualify for the administrative exemption,” according to the Labor Department's regulations.

Part of the reason for confusion is that despite the fact that these cases have been occurring for more than a decade, there hasn't been a major legal decision drawing the bright line. Most of those cases have resulted in settlements rather than formal opinions by a judge as to whether commission payments should prevent an adviser from being paid overtime, Ms. Liu said.

One of the few cases that resulted in litigation is the 2006 case of Takacs v. A.G. Edwards & Sons Inc. in the Southern District of California.

Judge John A. Houston denied a motion for summary judgment on the grounds that there were still genuine issues of material fact for advisers where a significant portion of pay was derived from sales rather than providing financial advice to customers.

“There is a genuine dispute as to the material fact of whether plaintiffs' work in 'cold-calling' or trying to sell defendant's financial products or services to new clients brings plaintiffs' work within the federal administrative exemption,” he wrote.

That case ended in a $20 million settlement.

A ruling that broadens the scope of who is able to receive overtime could give more ammunition to those cases, Ms. Liu said.

“It's highly likely that at least one function or outcome will be additional litigation, which is probably part of the criticism [of the Obama proposal],” she said.

Meanwhile, the industry continues to fight back against claims that advisers deserve overtime pay.

In 2006, the Labor Department wrote an opinion piece, which doesn't set legal precedent, stating that the execution of transactions was “incidental” to the registered representative's providing of financial advice and most brokers should still be classified as exempt from overtime pay under the administrative classification.

The firms too have denied claims that stockbrokers are misclassified as exempt and made arguments along the lines of the DOL's opinion that brokers are advising based on suitability standards, according to court documents.

JPMorgan Chase spokeswoman Lauren Francis said that the firm couldn't comment on pending litigation.

Some in the industry, however, say that attorneys are exploiting a loophole.

“Some of those lawsuits fulfill the purpose of the Fair Labor Standards Act, and others fall in the category of 'gotcha' lawsuits, where people look for the holes in the law and the misclassifications and then look to capitalize on those,” said Linda Friedman, an attorney with Stowell & Friedman.

She has, however, represented client associates in certain cases.

“Those are people for whom the [Fair Labor Standards Act] was passed,” Ms. Friedman said. “They're working insane hours, up at 6 in the morning on the West Coast and required to stay until the market closes and even longer because most clients are not on that schedule.”

Most firms, including Edward Jones and Morgan Stanley, already classify pre-production advisers and client associates as non-exempt.

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