SCOTUS Says Service Advisors Are Not “Not Exempt” from Overtime – At Least Not Yet

The Department of Labor’s new overtime rules go into effect at the end of the year. Naturally, we’re all concerned about who now will or will not be exempt from overtime rules. Will more employees be claiming overtime pay? Will employers have to start shelling out more money to employees? If so, how much? The new rules deal with what have been known as “white-collar” exemptions. There are, however, a host of other exemptions, that, while not as common, still impact a number of employers. One of them, service advisors,  was the subject of a US Supreme Court decision about two weeks ago.  Are they exempt from overtime? Well, according to the US Supreme Court they’re not not exempt.  What does that mean? Find out after the jump…

(image from scotusblog.com)

The case is Encino Motor Cars, LLC v Navarro et al No. 15–415 (June 20, 2016).  The exemption, enacted by Congress in 1966, excludes from  FLSA overtime requirements “any salesman, partsman or mechanic primarily engaged in servicing or selling automobiles” at a covered dealership.  But what is a “salesman”? Congress authorized Department of Labor promulgate rules and regulations regarding this new exemption. Congress exercised this authority in 1970, issuing a regulation that defined “salesman” as “an employee who is engaged for the purpose of and is primarily engaged in making sales or obtaining orders or contracts for sale of the vehicles…which the establishment is engaged in selling”. ( Just in case you’re interested, you can find this regulation at 29 C.F.R.§779.372(c)(1) (1971). If you’re not interested, ignore the cite–and I’m not insulted!) Most important for our discussion, this regulation excluded service advisors, who sell repair and maintenance services, but not vehicles, from this exemption. Shouldn’t that be the end of the inquiry then? Obviously not, or there would be no US Supreme Court case, and I wouldn’t go through all this with you. So what else could there be?

A number of courts disagreed with the DOL’s conclusion that service advisors are not included in this exemption. Then the DOL turned around in 1978 and issued an Opinion Letter stating that service advisors could be exempt under 29 USC 213(b)(10)(A), clearly stated this position in 1987, by amending its Field Operations Handbook. OK, so if they’re exempt, why are we even discussing this matter? Well, remember how the DOL changed its mind in 1978? (Of course you do, because I just said it in this same paragraph.) Well, it shouldn’t surprise you that the DOL changed its mind again in 2011, by adopting a final rule, whereby it reverted to its original 1970 conclusion, that only those who actually sell vehicles can be salesmen within the meaning of the exemption. What’s more, the DOL offered no reasonable explanation for abandoning its own 33-year-old practice of treating service advisors as exempt. Moreover, most courts also took–and still take– that same position.

You can see where this change by the DOL was going to lead to a lawsuit–and it did. Several service advisors at Encino Motor Cars sued it for overtime, based on the DOL’s 2011 Final Rule. Encino Motor Cars moved to dismiss, arguing that service advisors are included in the exemption. While the federal District Court agreed, and dismissed the case, the Ninth Circuit Court of Appeals reversed that ruling in part, deferring to the DOL’s 2011 Final Rule. The dealership appealed to the US Supreme Court.

Generally, courts are supposed to defer to administrative agency regulations that interpret the statutes they enforce. The SCOTUS declined to do so here. Why? The law being interpreted must be ambiguous and the interpretation must be reasonable and the agency must follow correct procedures in issuing the regulation. In particular, the agency must provide adequate reasoning for its decisions.  When an agency fails to do so, the interpretation, and any actions arising out of that interpretation are deemed arbitrary and capricious (and will generally be found to violate due process). When the DOL did its 180-degree turn in 2011, one could certainly have expected a reasoned explanation.   The SCOTUS therefore reversed the 9th Circuit’s ruling and sent the case back to the 9th Circuit to make further findings without considering the DOL’s 2011 rule, which, “cannot carry the force of law”.

Justice Kennedy, writing for the majority also made a very cogent, albeit concretely practical point, when he stated    “[r]equiring dealerships to adapt to the department’s new position could necessitate systemic, significant changes to the dealerships’ compensation arrangements”.

What does this mean? In light of most it not all other precedent stating the exact opposite position, service advisors will likely remain exempt from overtime — for now. It is at least theoretically possible that the DOL will take another crack at issuing a rule in which it applies a reasoned analysis. But let’s not get ahead of ourselves.

Now, if you are not an auto dealership that employs service advisors, why should you care about this case? I can think of a few reasons. First, you get some consolation that as aggressive as the DOL may appear, even it is subject to some limitations and it does not get automatic deference from the courts. Second, this is a good opportunity to remind you that if you find yourself subject to a DOL finding that your employees do not meet a particular exemption, they might still fit within a different statutory exemption. For example, these service advisors are sales people. If they are paid mostly on commission, they might meet the Commissioned Sales Representative (aka “inside sales”) Exemption.  So, don’t give up on the issue. See if your employees may be overtime-exempt under another exemption category.  What else? Whatever your industry, this is a good time to make sure you have properly classified your employees.  It is clear that the DOL is looking to increase the number of employees eligible for overtime pay.  Whether or not this particular exemption affects you, it can only help you to do whatever you can to get in front of these issues. This seems like a good place to end for now. See you next week!

Disclaimer: Contents of this post are for educational/informational purposes only, are not legal advice, and do not create an attorney-client relationship. Consult with competent employment counsel in the state(s) in which you employ people with your specific questions.

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