On Tuesday, 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.
Background on the Exemption
The FLSA expressly exempts “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles” from the Act’s overtime pay requirement. Because Service Advisors primarily engage in selling vehicle service work to customers, many auto dealers have long-classified these employees as exempt. Prior court decisions from the Fourth and Fifth Circuits supported the auto dealers’ classifying Service Advisors as exempt under the salesman exemption. Nevertheless, in 2011, the Department of Labor (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.”
In its Encino decision, the Ninth Circuit ignored the prior decisions from the Fourth and Fifth Circuits, and instead chose to defer to the DOL’s new regulations. Deferring to the DOL’s about-face, the Ninth Circuit held that Service Advisors were not salesmen, and thus were not exempt from the overtime pay requirements. In October 2015, Encino petitioned the Supreme Court to review the decision, resolve the newly-formed Circuit split, and restore uniformity in the legal precedent regarding classification of Service Advisors.
The Supreme Court’s Opinion
When the Supreme Court agreed to hear Encino’s petition earlier this year, many thought that the Court would provide final resolution as to whether Service Advisors are exempt. Unfortunately, the Court’s Opinion fails to do so. Instead, the Court vacated and remanded the case back to the Ninth Circuit to reconsider the issue without giving weight to the DOL’s regulations. In his Opinion, Justice Kennedy instructed that the FLSA “must be construed without placing controlling weight” on the DOL’s 2011 regulations because the agency issued those regulations without “reasoned explanation that was required in light of the change in position and the significant reliance interests involved.” In other words, according to the Court, the DOL discarded 33 years of precedent exempting Service Advisors and then failed to provide any real “reasoned explanation” for the change. As such, the Court held it was not proper for the Ninth Circuit to defer to the DOL’s 2011 regulations. The Ninth Circuit was instructed to interpret whether the FLSA overtime exemption for “salesmen” included Service Advisors, without placing controlling weight on the DOL’s 2011 regulations.
Insights for Auto Dealerships
For now, the Supreme Court has refrained from deciding the ultimate issue of whether Service Advisors are exempt from the FLSA overtime pay requirement by remanding the case back to the Ninth Circuit for further proceedings. It is unclear how the Ninth Circuit will rule if it cannot defer to the DOL’s regulations. However, with a vacated opinion, there is no longer a circuit split and the case law from the Fourth and Fifth Circuits favoring exempt status remains intact. While the current legal landscape favors exempt status, this may change with a further decision from the Ninth Circuit or even potential new regulations from the DOL. Accordingly, auto dealerships should proceed with caution and partner with employment counsel in determining how to classify Service Advisors. Auto dealerships should also consider the potential application of other overtime pay exemptions to Service Advisors, such as the 7(i) retail sales exemption.
We will continue to track this case and provide updates as events dictate.
