Mitchell v. Kentucky Finance Co.: Overtime Protections for Loan Officers

In Mitchell v. Kentucky Finance Co., 359 U.S. 290 (1959) the Supreme Court held that the business of making personal loans to individuals does not constitute “sales of . . . services” by a “retail or service establishment,” within the meaning of the retail and service establishment exemption to the Fair Labor Standards Act. This is the case regardless of whether the company might be thought of in the financial industry as being engaged in “retail financing.” Mitchell is important because it helps ensure that mortgage loan officers and other similar positions are entitled to overtime pay. 

Statutory Background – Retail and Service Establishment Exemption

The FLSA generally requires employers to pay overtime, i.e. one and one-half the employee’s regular rate of pay, for each hour the employee works over forty in a work week. 29 U.S.C. § 207(a)(1). The FLSA also contains certain exemptions to the overtime requirement, including Section 7(i). 29 U.S.C. §207(i). Under Section 7(i), a “retail or service establishment” is not required to pay an employee overtime if “(1) the regular rate of pay of such employee is in excess of one and one-half times the minimum [wage], and (2) more than half his compensation for a representative period (not less than one month) represents commissions on goods or services.” 29 U.S.C. § 207(i). To establish that the exemption applies, an employer must show that it is a “retail or service establishment.” 

Section 7(i) does not define the term “retail or service establishment.” However, when Congress enacted Section 7(i) in 1961, a separate FLSA provision, 29 U.S.C. § 213(a)(2), exempted certain retail or service establishments from both overtime and minimum wage requirements. Charbonneau v. Mortg. Lenders of Am., LLC, No. 18-2062-HLT-ADM, 2020 WL 4334981, at *3 (D. Kan. July 28, 2020), citing Fair Labor Standards Amendments of 1961, Pub. L. 87-30, § 6, 75 Stat. 65, 71 (1961) (setting forth amendments to 29 U.S.C. § 213). Section 13(a)(2) defined a “retail or service establishment” to mean “an establishment 75 per centum of whose annual dollar volume of sales of goods or services (or both) is not for resale and is recognized as retail sales or services in the particular industry.” Id. Congress repealed Section 13(a)(2) in 1989, but most courts have determined that the identical term in Section 7(i) has the same meaning. For example, the Eighth Circuit explained:

When Congress passed § 207(i) in 1961, it specifically stated that the term “retail or service establishment” was to have the same meaning in that section as it did in § 213(a)(2). See 29 C.F.R. § 779.411 (1992). Thus, any construction of the term as defined in § 213(a)(2) became a part of the definition of the term as found in § 207(i). Nothing in the 1990 amendments changed § 207(i). The term “retail or service establishment” still remains, and there is no expression of congressional intent that it should be construed any differently. Absent specific congressional intent, we will not conclude that Congress retained the term “retail or service establishment” in § 207(i) yet at the same time discarded thirty years of established meaning.

Reich v. Delcorp, Inc., 3 F.3d 1181, 1183 (8th Cir. 1993); Charbonneau, 2020 WL 4334981, at *3 (D. Kan. July 28, 2020) (same, collecting cases). The DOL also interprets the term “retail or service establishment” in Section 7(i) to have the definition set forth in Section 13(a)(2). See 29 C.F.R. § 779.411.

For these reasons, the Supreme Court’s interpretation in Mitchell of “retail and service establishment” under the old Section 13(a)(2) governs the meaning of “retail and service establishment” under the current Section 7(i). 

Facts

Mitchell involved a suit to enjoin Kentucky Finance Company from violating the overtime and recordkeeping provisions of the FLSA. Kentucky Finance Company and a sister company were engaged in the business of making personal loans, in amounts up to $300, to individuals, and in purchasing conditional sales contracts from dealers in furniture and appliances. 

The parties agreed that the company was subject to the FLSA’s overtime and recordkeeping provisions unless it constituted a “retail and service establishment” under Section 13(a)(2). 

The question for the Court was therefore whether a company in the business of making personal loans to individuals constituted a “retail and service establishment” within the meaning of the FLSA. 

The Court’s Decision

The Mitchell Court held that a personal loan company and “other financial institutions” including banks, insurance companies, and credit companies were not “retail or service establishments” within the meaning of Section 13(a)(2) because “there is no concept of retail selling or servicing in these industries.” Mitchell, 359 U.S. at 295. This is the case under the FLSA even if the company might be thought of in the financial industry as being engaged in “retail financing.” The Court observed:

[E]nterprises in the financial field … regardless of whether they were thought of in the financial industry as engaged in ‘retail financing,’ remained unaffected by the amendment of s 13(a)(2).

359 U.S. at 294-95. The Court further observed that the legislative history of the FLSA made clear that loan companies and other financial institutions were not covered by the retail and service establishment exemption:

Any residual doubt on this score is dispelled by the explicit and repeated statements of the sponsors of the amendatory legislation and in the House and Senate Reports to the effect that ‘The amendment does not exempt banks, insurance companies, building and loan associations, credit companies, newspapers, telephone companies, gas and electric utility companies, telegraph companies, etc., because there is no concept of retail selling or servicing in these industries.

359 U.S. at 295 n6 (citing  H.R.Conf.Rep., 95 Cong.Rec. 14932, U.S.Code Cong.Service 1949, p. 2265; Report of Majority of Senate Conferees, 95 Cong.Rec. 14877; and statement of Senator Holland, 95 Cong.Rec. 12505—12506.) The Court further held that “credit companies” covers “companies which deal in credit[.]” Under Mitchell, therefore, loan companies, credit companies, or other financial institutions do not qualify for the retail and service establishment exemption from the FLSA’s overtime requirements. 

Analysis

Courts have subsequently confirmed that under Mitchell, employers selling financial products, including mortgages or other personal loans, are not retail or service establishments eligible for the overtime exemption. See, e.g., Charbonneau, 2020 WL 4334981, at *3 (collecting cases); In re Wells Fargo Home Mortg. Overtime Pay Litig., No. C 06-01770 MHP, 2008 WL 2441930, at *3-*6 (N.D. Cal. June 13, 2008) (finding exemption did not apply to bank that provides a variety of financial products and services, including mortgages); Pontius v. Delta Fin. Corp., No. 04-1737, 2007 WL 1496692, at *4-*6 (W.D. Pa. Mar. 20, 2007) (same, mortgage lender), report and recommendation adopted, No. CIV.A. 04-1737, 2007 WL 1412034 (W.D. Pa. May 10, 2007); Barnett v. Wash. Mut. Bank, FA, No. C 03-00753 CRB, 2004 WL 1753400, at *4-*6 (N.D. Cal. Aug. 5, 2004) (same, where plaintiffs were call center employees that sold mortgages and home equity loans); Casas v. Conseco Fin. Corp., No. CIV.00-1512(JRT/SRN), 2002 WL 507059, at *3-*5 (D. Minn. Mar. 31, 2002) (same, where plaintiffs were loan originators for lending products such as home improvement loans, home equity loans, and manufactured and mobile home mortgages).

In sum, Mitchell held that the business of making personal loans does not constitute “sales of . . . services” by a “retail or service establishment,” within the meaning of the retail and service establishment exemption to the FLSA. The case is important because it helps ensure that mortgage loan officers and other similar positions are entitled to overtime pay.

This article was also published on TimCoffieldAttorney.com.

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