U.S. Supreme Court Looks at Service Advisor Overtime Pay

The recent Supreme Court decision in Encino Motorcars, LLC v. Navarro is a major victory for dealerships in the battle with the Department of Labor on overtime pay to service advisors. For now, the worst-case scenario of enforcing overtime pay for service advisors has been avoided and the legal arguments supporting overtime pay have been weakened. This article will explore 1) the history of the automobile exemption and how the industry has fought for it, 2) the Encino case and how it came to the Supreme Court, and 3) what the Encino decision means for dealerships moving forward.

The Automobile Exemption from FLSA Overtime Pay:

Under the Fair Labor Standards Act (FLSA), employers are generally responsible for making overtime payments at time-and-a-half to employees working over forty hours a week. Ever since 1966, the automotive industry has benefited from a blanket exemption from this practice for “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles.” (the Automobile Exemption). The heart of the controversy here is whether the language contemplates a service advisor as a “salesman. . . primarily engaged in. . . servicing automobiles.” The opposing interpretation is that “salesman” here only applies to an employee “selling. . . automobiles.”

From 1978 until 2011, the Department of Labor (the Department) considered service advisors to be included in the Automobile Exemption and thus exempt from overtime pay. This was determined in an administrative opinion and reflected in the Wage and Hour Field Operations Handbook for over 30 years.  However, in 2011, the Department changed its mind and ruled that service advisors were no longer included in the automobile exemption. This 180-degree flip in Department stance resulted in an immediate reaction from the industry. With the NADA leading the charge, Congress placed a provision in the 2012 budget preventing the Department from enforcing its new decision on service advisors until March, 2013.

Background on Encino Case:

Encino Motorcars, LLC is a Mercedez-Benz franchise holder in California. This litigation began in 2012 when a group of five current and former service advisors employed by Encino decided to sue for overtime pay, claiming violations of the FLSA. These service advisors were compensated on a commission basis and required to work from 7 a.m to 6 p.m. at least five days per week. The District Court held that service advisors fall within the Automobile Exemption above and dismissed all claims. The Department appealed to the 9th Circuit Court of Appeals, which reversed course and held that deference should be given to the interpretation in the Department’s 2011 ruling. Because this ruling conflicted with decisions by the 4th and 5th circuit courts, the Supreme Court granted certiorari to resolve the conflict.

U.S. Supreme Court’s Decision on Encino:

After oral arguments in April, 2016, the U.S. Supreme Court, on June 20, 2016, released their final opinion in Encino Motorcars, LLC v. Navarro, No. 15-415, slip. Op. (U.S. 2016). In a majority opinion written by Justice Kennedy, the Court held that the 9th Circuit should not have given deference to the 2011 Department regulation. This was because the Department failed to give adequate reasons for its change in long-standing policy. However, the Court stopped short of making a definitive interpretation of the Automobile Exemption, choosing instead to send that decision back for the 9th Circuit to determine.

This is a positive result for dealerships because the 9th Circuit may decide that service advisors fall within the Automobile Exemption. This would be in line with similar decision made by the 5th Circuit in the Deel Motors case, the 4th Circuit in Greenbrier Ford, as well as the dissenting opinion in Encino, written by Justice Thomas and joined by Justice Alito.  If the 9th Circuit finds that service advisors fall under the Automobile Exemption, that will be the end of this debate unless another U.S. Appellate Court decides a similar case differently or the Department pursues additional regulations.

Although it would be a surprise, it is entirely possible for the 9th Circuit to go the other way and choose to require overtime pay to service advisors. If this happens, we would likely see another round back up to the Supreme Court on this same issue. The end result is that, until the 9th Circuit renders another opinion, the fate of overtime pay to service advisors remains uncertain.

What to Expect Now After Encino:

Make no mistake — the Department’s interpretation of the Automobile Exemption has been weakened by the Encino decision. Because the 2011 Ruling is on the books, the Wage and Hours Division of the Department has had the right, since March 2013, to audit dealership records and assess payment of overtime wages and penalties for service advisors. If and when the Department takes this action against an auto dealer in Iowa, which is governed by the 8th Circuit, it will likely be much easier to win those cases under Encino than otherwise. Encino basically states that the courts no longer have to give priority to the Department’s interpretation of the Automobile Exemption, thus, allowing courts to freely interpret the language. Because almost every court that has evaluated the Automobile Exemption has determined that service advisors should be included, it is likely that courts here in Iowa will decide the same.

Notwithstanding the Automobile Exemption, there are other provisions of the FLSA that may provide exemptions for service advisors who are paid on a commission basis. To meet this 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.

But keep in mind, the service advisors in the Encino case were under a commission structure and that dealership was still drawn into extended litigation. Dealer Law Review will continue to monitor this issue closely and provide updates as they arise. If you have concerns about your employee compensation structure, your compliance with FLSA regulations, or are currently being audited by the Wage and Hour Division, be sure to contact experienced auto dealer counsel.