Earlier today (April 2, 2018), the U.S. Supreme Court ruled that auto service advisers (also commonly referred to as “service writers”) are exempt from overtime under the Fair Labor Standards Act (“FLSA”).  Today’s ruling in Encino Motorcars LLC  v. Navarro et. al. has affirmatively answered the long-standing question as to whether auto service advisers are covered by the FLSA’s “salesman” overtime exemption, which includes “any salesman, partsman or mechanic primarily engaged in selling or servicing automobiles.”  The Court’s decision overturned the Ninth Circuit Court of Appeals ruling that service advisors do not fall under the exemption, and followed rulings in both the Fourth and Fifth Circuit Court of Appeals holding that they were exempt from overtime.

As we have previously communicated, this is the second time the Supreme Court was asked to decide this issue.  In June 2016, the Court declined to decide the ultimate issue as to whether service advisers were exempt, and instead remanded the case back to the Ninth Circuit for reconsideration without giving weight to the regulations issued by the U.S. Department of Labor in 2011 (those DOL regulations provided that service advisers were no longer exempt from overtime pay).  On remand, the Ninth Circuit disregarded the DOL’s regulations and focused solely on the language and intent of the FLSA, but again found that service advisers do not fall within the meaning of the terms “salesman, partsman, or mechanic,” and therefore were not exempt from overtime pay.

Encino then appealed the Ninth Circuit’s newest ruling, and the Supreme Court agreed to hear the case for a second time. Oral argument took place in January.  In today’s opinion, the Court focused on the meaning of term salesman – someone who sells goods or services – and noted that service advisors sell services to customers for their vehicles.   The Court therefore concluded that service advisors do in fact typically operate as a salesman primarily engaged in the sale of services for automobiles, thus falling within the salesman overtime exemption.

This is a big win for auto dealerships.  While the Court’s opinion covers any claims under the FLSA, auto dealerships should keep in mind that state law might be different from federal law and should be consulted.  For example, in Illinois, we continue to advise dealerships to structure their service adviser pay plans to comply with the 7(i) sales exemption, which is expressly included in the Illinois Minimum Wage Law.

On September 28, 2017, the U.S. Supreme Court agreed to hear a case in which the Court will be asked to decide whether the FLSA’s overtime exemption covering “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles.” The case is Encino Motorcars v. Navarro, No. 16-1362.

If this sounds like déjà vu to anyone, that’s because the Supreme Court heard and issued a ruling on this very same case in June 2016. As we explained in our summary of that decision, the Court punted on the ultimate question of whether service advisers are exempt. Instead, it held that the DOL regulations that the Ninth Circuit Court of Appeals relied upon to hold that service advisers are not exempt were invalid. Rather than decide the matter, the Court remanded the case back to the Court of Appeals for reconsideration. On remand, the Court of Appeals reconsidered the issue without reference to the views of the Department of Labor. Looking solely at the language and intent of the statute, the Court of Appeals once again found that service advisers do not fall within the meaning of the terms “salesman, partsman, or mechanic” as used in the FLSA.

This ruling once again puts the Ninth Circuit’s position on the exemption at odds with rulings in the Fourth and Fifth Circuits. This time around, we anticipate that the Supreme Court will definitively resolve the issue one way or another.

In the meantime, automobile dealerships that employ service advisers or service writers should continue to think carefully before relying on the sales / parts / mechanics overtime exemption. Even in those circuits where the Courts of Appeals have ruled that the exemption applies to service advisers, a different ruling from the Supreme Court would supersede those decisions. Further, auto dealers should be mindful that state law might differ from federal law. In Illinois for example, the Illinois Minimum Wage Law provides an exemption for salesmen and mechanics, but does not include partsmen. 820 ILCS 105/4a(2)A. For the moment it’s not clear how a ruling on the federal exemption would affect the law in Illinois.

Until all of this is sorted out, auto dealers who wish to classify their service writers or service advisers as exempt from overtime may wish to focus on the FLSA Section 7(i) exemption for employees of retail or service establishments who are paid primarily on a commission basis. For more information on how service advisers can fall under that exemption, check out this post.

 

As we reported back in October 2015 a car dealership, Encino Motorcars, petitioned the Supreme Court to “restore uniformity” to the enforcement of legal precedent and hold that service advisors are exempt from the FLSA’s overtime requirements.  On Friday, the Supreme Court agreed to hear the case and hopefully resolve the issue once and for all as to whether service advisors are entitled to overtime pay.

The Salesman Exemption

To recap, the Fair Labor Standards Act (FLSA) explicitly exempts “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles” from the Act’s overtime pay requirement.  Service Advisors primarily sell vehicle servicing work to customers, and often times they are paid on commission.  This has led many dealerships to treat these employees as exempt “salesman.”  The Department of Labor (DOL) and the courts are in conflict on this issue.   Legal precedent supports the dealers, with the Fourth and Fifth Circuits previously holding that service advisors are salespeople, and thus exempt from the overtime provisions of the FLSA.  However, in 2011, the DOL changed its (previously) long-standing enforcement position and stated that it would no longer consider service advisors exempt from overtime under the “salesman” exemption, concluding that the exemption was limited “to salesmen who sell vehicles and partsmen and mechanics who service vehicles.”

The Ninth Circuit Rules Service Advisors Are Non-Exempt

In September 2012, service advisors sued the dealership for unpaid overtime, claiming that they were not exempt because they did not sell cars or perform repairs. The lawsuit was initially dismissed by the District Court but was given new life by the Ninth Circuit on appeal.  In March 2015, in Navarro et al. v. Encino Motorcars, LLC, the Ninth Circuit held that the dealership’s service advisors were non-exempt employees under the FLSA.  The Court, relying on the DOL’s guidance, held that because the service advisors neither sold nor personally serviced vehicles, they were not exempt from the overtime provisions of the FLSA.  This decision was in direct conflict with the prior decisions out of the Fourth and Fifth Circuits, which declined to adopt the DOL’s position. Encino Motorcars then appealed the case to the Supreme Court to address this split and make a final determination as to whether service advisors are exempt from the FLSA overtime requirements.

The Dealership Petitions the Supreme Court

In its petition to the Supreme Court, the dealership argued that the service advisors are “salesmen primarily engaged in servicing automobiles.” Additionally, the dealership argued, among other things, that the DOL’s interpretation is unreasonable, and undeserving of deference, because it “injects a glaring textual anomaly over the status of ‘partsmen,’ who the statute treats as exempt even though they are not personally involved in either selling or servicing automobiles.”  The dealership cautioned that the Ninth Circuit’s erroneous decision has far-reaching implications and further injects uncertainty over prior legal precedent.

The service advisors countered, urging the Supreme Court to pass on the case. The service advisors claimed that this was not an issue of national concern and any ruling would be limited, citing to what they characterized as a “skeletal record” on appeal that would not adequately address the exemption of service advisors generally.

Although the Supreme Court agreed to hear the case, it gave no insight or explanation as to its reasons for doing so.  While we are hopeful that the Court will finally address this issue for dealers stuck in limbo, we will have to wait and see the ruling. 

We will continue to follow this case and keep you up-to-date on the Supreme Court’s decision.  In the meantime, please contact us if you have any questions about how to classify your service advisors pending the Court’s decision.

As you have read in our blog over the years, the misclassification of employees as exempt is one of the primary claims in wage and hour litigation.  Misclassification claims can arise in many forms, including the classification of a certain job in a particular industry.  Mortgage loan officers anyone?  Today’s post is focused on the world of car dealerships – specifically the job of service advisors.

The FLSA explicitly exempts “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles.”  The primary duty for service advisors is to sell vehicle servicing work to customers.  As a result, many dealerships have long treated these employees as “salesman,” exempt from the FLSA overtime provisions.  The Department of Labor (DOL) and the courts had previously conflicted on this issue.   The Fourth and Fifth Circuits previously held that service advisors were exempt from the overtime provisions of the FLSA.  Then, in 2011, the DOL changed its (previously) long-standing enforcement position and would no longer consider service advisers exempt from overtime under the “salesman’ exemption, concluding that the exemption was limited “to salesmen who sell vehicles and partsmen and mechanics who service vehicles.”

Not a lot has happened since until March of this year.  In March, in the Ninth Circuit’s decision, in Navarro et al. v. Encino Motorcars, LLC, the Court held that the dealership’s service advisors were non-exempt employees under the Fair Labor Standards Act .  The Court, deferring to the DOL’s guidance, held that because the service advisors neither sold nor serviced vehicles, they were not exempt from the overtime provisions of the FLSA.  This decision is in direct conflict with the prior decisions out of the Fourth and Fifth Circuits. Encino Motorcars has appealed the case to the Supreme Court to address this Circuit split and make a final determination as to whether service advisors are exempt from the FLSA overtime requirements.

In its petition to the Supreme Court, the dealership argues that the service advisors are “salesmen primarily engaged in servicing automobiles.” Additionally, the dealership argues, among other things, that the DOL’s interpretation is unreasonable, and undeserving of deference, because it “injects a glaring textual anomaly over the status of ‘partsmen,’ who the statute treats as exempt even though they are not personally involved in either selling or servicing automobiles.”

The employees’ response to the dealership’s petition is due December 4, 2015. We will continue to follow this case and keep you up-to-date on the Supreme Court’s decision.

Reversing a district court decision, and declining to follow decisions from a number of other courts, including the Fourth and Fifth Circuits, the Ninth Circuit has deferred to the Department of Labor’s (DOL) “flip-flopped” view of whether the FLSA’s exemption for “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles,” applies to auto dealer service advisors/service writers.

The decision comes on the heels of the Supreme Court’s decision in Perez v. Mortgage Bankers Association acknowledging that a federal agency can indeed “flip flop” its interpretations of laws with each new administration without first going through the more laborious process of promulgating new regulations. In April 2011, the DOL did just that, disavowing its 24-year-old opinion that Fair Labor Standards Act’s Section 13(b)(10)(A) overtime exemption applies to auto dealership employees working as service advisors, writers, etc. The DOL’s new interpretation contended that a “service advisor” was not included in Section 13(b)(10)(A)’s list of “salesman, partsman, or mechanic,” which meant that service advisors/writers would no longer be considered exempt from the FLSA’s overtime requirements. The DOL’s reversal came despite at least five federal courts since the 1970s finding that service advisors/writers were exempt under the same language.

Examining this new interpretation for the first time in Navarro v. Encino Motorcars, LLC, the Ninth Circuit held that the DOL’s opinion was entitled to deference because the underlying FLSA language was ambiguous. “[W]here there are two reasonable ways to read the statutory text, and the agency has chosen one interpretation, we must defer to that choice,” the court wrote, reversing a district court’s dismissal of a service advisor’s FLSA and state wage and hour law claims.

Like many dealers, Encino Motorcars employed service advisors whose jobs required them to greet customers, evaluate their service needs, and make recommendations about repairs. The advisors also solicited customers for additional repairs or maintenance, and prepared service estimates. The dealership paid its service advisors on a commission-only basis. The district court dismissed the service advisors’ overtime claims, concluding that the employees fell within the auto sales, parts, and mechanics exemption under the Section 13(b)(1)(A). The Ninth Circuit reversed under a Chevron deference analysis, observing that FLSA exemptions must be narrowly construed in favor of employees. The court acknowledged that a service advisor could be a “salesman” under the FLSA, but that the law could be read equally “in a more cabined way: a salesman is an employee who sells cars; a partsman is an employee who requisitions, stocks, and dispenses parts; and a mechanic is an employee who performs mechanical work on cars.” Finding that the legislative history was of no more help, and since service advisors did none of the three things under the court’s “cabined” view, the Court reasoned that it was up to the DOL to fill the gap in the statute.

Here, the Ninth Circuit declined to find that the DOL had acted inconsistently or unreasonably. “The Department of Labor’s regulations consistently—for 45 years—have interpreted the statutory exemption to apply narrowly. The agency reaffirmed that interpretation most recently in 2011, after thorough consideration of opposing views and after a formal notice-and-comment process. Under these circumstances, Chevron provides the appropriate legal standard.” Nonetheless, said the court, under Perez, if the 2011 final rule did amount to a change of position on the reach of the exemption, the DOL was still entitled to deference.

Employer Insights

The decision to find service advisors non-exempt in the Ninth Circuit conflicts with the Fourth and Fifth Circuits on this issue, as well as the Supreme Court of Montana and several federal district courts. Nonetheless, that’s the law for now in Alaska, California, Hawaii, Idaho, Montana, Nevada, Oregon, and the State of Washington (as well as the CNMI and Guam). As we noted in the aftermath of Perez, though, three justices (Alito, Scalia, and Thomas) have explicitly raised broad questions about agency deference in situations like this. Even the Perez majority opinion raised questions about the long term vitality of judicial deference to interpretations like the DOL’s. Perhaps this circuit split will be the vehicle that the Supreme Court uses to reconsider its longstanding agency deference doctrine.

All is not lost for auto dealers, though. Service advisors often qualify for the alternative exemption available under FLSA Section 7(i) for commissioned sales employees.  To meet the 7(i) exemption service advisors must meet all of the following criteria:

  1. The service advisor must be employed by a retail or service establishment (an auto dealership qualifies); and
  2. The service advisor’s regular rate of pay must exceed 1.5 times the applicable minimum wage for every hour worked in a workweek; and
  3. More than half of the employee’s total earnings in a representative period must consist of commissions on goods or services.

This exemption has some quirks, too, which we’ll examine in an upcoming Wage and Hour Basics post on the commissioned sales employees.

Yesterday, the United States Supreme Court issued its long-awaited decision in the Encino Motorcars, LLC v. Navarro case, that many hoped would resolve the issue as to whether Service Advisors at auto dealerships are exempt from the overtime provisions of the Fair Labor Standards Act (FLSA).  As we reported back in January 2016, the Supreme Court agreed to hear a petition filed by an auto dealership, Encino Motorcars, challenging a Ninth Circuit decision holding that Service Advisors were not exempt from overtime pay requirements.  Encino asked that the Court “restore uniformity” in legal precedent and hold that Service Advisors are exempt from the FLSA’s overtime pay requirements.  Auto dealers were hoping that the Supreme Court would bring certainty to this issue and follow prior decisions from the Fourth and Fifth Circuits holding that Service Advisors are salespeople exempt from overtime, instead of following the Ninth Circuit’s contrary decision.  Although the Supreme Court ultimately vacated the Ninth Circuit’s decision, the Court’s opinion leaves the issue open to further consideration. Continue Reading The Supreme Court Shoots Down DOL Regulations, But Declines To Rule Whether Service Advisors are Exempt From Overtime Pay Requirements