Although registered representatives in the financial services industry (e.g., financial advisors, stockbrokers, etc.) generally have been treated as exempt from the minimum wage and overtime requirements of the federal Fair Labor Standards Act (“FLSA”), several recent lawsuits have called into doubt this exempt status.  On November 27, 2006, the federal Department of Labor (“DOL”) issued an opinion letter which clarifies that registered representatives generally are exempt under the FLSA, under both the old and the new regulations, even if they are compensated, in part, on a commission or fee basis, provided that the registered representative’s compensation package includes a guaranteed, nonrecoverable minimum salary or draw of at least $455 per week. Read the DOL Opinion Letter.

The administrative exemption, which applies generally to registered representatives, exempts any employee:

(i) compensated on a salary or fee basis at a rate of at least $455 per week; (ii) whose primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers; and (iii) whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.  29 C.F.R. § 541.200(a).

The DOL confirms that registered representatives meet the duties tests of the administrative exemption if their work primarily includes:

  • collecting and analyzing a client’s financial information;
  • advising the client about the risks and the advantages and disadvantages of various investment opportunities in light of the client’s individual financial circumstances; and
  • recommending to the client only those securities that are suitable for the client’s particular financial status, objectives, risk tolerance, tax exposure and other investment needs.

See 29 C.F.R. § 541.203(b).  The duties tests may be met even if the registered representative uses computers or other technology, provided that the technology does not select the particular investments for clients and the registered representative ultimately remains responsible for assessing alternatives and making recommendations that best serve each client.

More helpfully, the DOL has clarified that the salary basis test of the administrative exemption may be met where a registered representative is paid both (i) a guaranteed minimum salary or draw of at least $455 per week and (ii) additional compensation above the guaranteed minimum, even if calculation of the additional compensation takes into account the minimum guarantee.  In this opinion letter, the DOL withdraws several earlier opinion letters and notes that:

It is immaterial what specific terms (draw against commission, draw plus extra compensation, offset method) an employer uses when compensating employees on a fee or commission basis.  What matters is that the employee receives no less than the weekly-required amount as a guaranteed salary constituting all or part of total compensation, which amount is not subject to reduction due to the quality or quantity of the work performed, and that the employee is never required to repay any portion of that salary even if the employee fails to earn sufficient commission or fees.  Provided that these requirements are met, the employee will be considered to be paid “on a salary basis” irrespective of any additional sums paid to the employee, such as the amount by which commission earned for a specific period exceed the total of the weekly guarantee paid for the same period.

In short, the salary basis test may be met, regardless of any additional compensation paid to the registered representative, so long as the registered representative receives a guaranteed minimum predetermined payment of at least $455 per week which is not subject to reduction or repayment.

Although this opinion letter is helpful in addressing the exemption of registered representatives under the FLSA, most states have comparable minimum wage and overtime requirements, and some may not supply a comparable exemption for registered representatives.  Any determination of an employee’s exempt status should take into account the vagaries of any applicable state law.

Financial services firms should review the duties of and compensation paid to registered representatives to ensure that the requirements for exemption are met in light of this new opinion letter.  Please let us know how we may assist you in evaluating these or analogous positions further.