DOL Closes the Door on Mortgage Originators Paid as Independent Contractors

In the fast-paced world of mortgage lending, a crucial yet often overlooked issue is always lurking between companies and those mortgage loan originators they employ;  the misclassification of mortgage loan originators.

Often labeled as independent contractors, many of these financial professionals find themselves in a precarious position, unable to meet the stringent criteria that truly define independent work. This mislabeling is not just a minor error in terminology, but a significant concern that raises questions about competing fairly, fair compensation, job security, and the very nature of employment in the mortgage industry.

As we delve into the specific challenges faced by these loan originating companies, we uncover a systemic problem that blurs the lines between autonomy and obligation, reshaping our understanding of what it truly means to be a ‘contractor’ in the complex world of mortgage finance.”

The US Department of Labor Just released 29 CFR Parts 780,788, and 795 Employee or Independent Contractor Classification Under the Fair Labor Standards Act, a Final rule going into effect on March 10, 2024.

The Ruling clarifies that registered and state-licensed mortgage loan originators cannot meet the threshold to be classified as independent contractors under the Fair Labor Standards Act FLSA.

Let’s start with the fact that the Fair Labor Standards Act starts with the presumption that every “worker” is an “employee” until they can prove otherwise.  It is not a requirement of the law to prove MLOs are NOT employees.  It is the employer and employee’s responsibility to determine if the working arrangement meets the criteria of independent contractor status.  

Let’s look at the basic tenets of criteria that determine worker status and why loan originators cannot meet them:

1. Integral Part of the Employer’s Business: This factor examines whether the work performed by the worker is a core aspect of the employer’s business. If the work is central to the business, it is more likely that the worker is an employee. (This is by far, the most compelling reasons for W-2 status. MLOS are in the same line of business (mortgage origination) as the employer.  An example of an true independent business would be an accounting service, marketing company, law firm, software vendor…all of whom are not in the business of mortgages,)

2. Opportunity for Profit or Loss Depending on Managerial Skill: This criterion looks at whether the worker has the opportunity to make more or less money based on their own managerial decisions. Independent contractors typically have the ability to affect their profit or loss directly through their business decisions, unlike employees. (MLOS usually are not participating in the profits or loss of the employer.  (MLO compensation is set by agreement between the employee and employer and in compliance with the LO Comp Rule must be in basis points tied to the loan, unless there is a salary or hourly agreement.) 

3. Relative Investments of the Employer and Worker: This factor compares the investments made by the worker and the employer in their business/work. A significant investment by the worker might indicate an independent contractor status, as it suggests a level of autonomy and financial risk-taking. (MLOs usually do not invest in the location, equipment, staffing, employee benefits, business licenses and insurance all of which must be paid for by the company regardless of the revenue generated or losses incurred.)

4. Special Skills and Initiative: This assesses whether the work requires special skills and initiative. A worker who offers specialized skills and shows business initiative (like marketing their services or seeking new customers) may be considered an independent contractor. (While MLOs market themselves to acquire business, it is these very skills and initiative that the employer is hiring the employee for.)

5. Permanency of the Relationship: This considers the duration and nature of the relationship between the worker and the employer. A more permanent or long-term relationship can indicate an employee status, whereas independent contractors typically work on a temporary or project-specific basis. (Employers “hiring” a MLO employee, usually do so for the long term.  These positions are not short-term or temporary.  Employment agreements do not have an end date.  MLOS are seeking “employment” when the accept a position.)

6. Degree of Control by the Employer: This factor evaluates how much control the employer has over the worker, including work schedules, conditions, and how the work is performed. Employees are generally subject to more control by the employer, while independent contractors usually enjoy more freedom in how they complete their work. (Employees of mortgage companies have some autonomy, but not enough to say they can make business decisions separate from the employer.  MLOS rely on sponsorship without which, they legally cannot originate, they rely on the vendors (credit services, software, compliance and other services) selected and contracted for by the employer.  And the SAFE Act REQUIRES the employer to take responsibility for the actions of the MLO.) 

The most important criteria for determination of worker status is each situation must be looked at in the totality of the employment.  No one factor should be the overriding determinant.  It is the whole picture that federal regulators will consider when analyzing employment status. 

State mortgage regulators may tell you “it’s ok.”  But it’s not!  States cannot override federal tax and labor laws.  

So…if you are currently reporting MLOS wages on a 1099, it’s time to convert to reporting on W-2.  It could very well be that the IRS tabled audits and enforcement pending this final rule.

Be proactive.  Most businesses cannot survive the consequences of getting caught on misclassification.  Businesses are liable for back withholding taxes, interest, penalties, unemployment taxes, and other “employee” benefits.  If MLO wages were reported on 1099 allowing them to use the opportunity to deduct expenses, it may be time to set up an Accountable Plan to help them and the business with tax planning.    

For a deeper dive on this topic check out this article. 

Questions or comments:  deb@cloes.online or (866) 256-3766.

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