Justices shutdown 9th Circuit on overtime

In a 6-2 victory for car dealers across the nation, the U.S. Supreme Court has rejected a 9th U.S. Circuit Court of Appeals opinion holding that service advisors are not exempt from the overtime provisions of the Fair Labor Standards Act (FLSA). Encino Motorcars LLC v. Navarro, 2016 DJDAR 5929 (June 20, 2016). However, with remanding and directions for reconsideration in light of the statutory language, it may be many months before there is finality to the overtime status of service advisors.

Facts

Five service advisors at a California retail auto dealer sued seeking back pay, claiming that they were not exempt from the overtime laws of the FLSA. Their complaint alleged that their duties were to meet owners entering the dealer service area, to evaluate the service and/or repair needs of the owner, then to suggest services to remedy the owner complaints. They also suggest supplemental services beyond that required in response to the initial complaints, and write up an estimate. They frequently call the owner to solicit and suggest additional work done at additional cost. The dealer in question, like many across the United States, pays its advisors on a commission basis only, not an hourly wage or salary.

Responding to the defendant's motion, the U.S. district court in L.A. dismissed the complaint, agreeing that Section 213(b)(10)(A) of the act exempts such advisors. The 9th Circuit reversed, giving deference to a 2011 Department of Labor regulation that determined that service advisors are not covered by the statutory language referring to "salesman, partsman and mechanics."

Regulatory History

In 1966, Congress amended the FLSA to exempt any salesman primarily engaged in selling or servicing automobiles while employed by a nonmanufacturing business primarily selling vehicles to the ultimate purchaser. In 1970, the DOL issued a regulation excluding service advisors who sell repair and maintenance services, but not vehicles. In 1978, after several courts rejected the interpretation, and consistent with the "selling or servicing" language, the DOL changed course and in a final rule stated that service advisors could be exempt.

In 2011, the DOL issued a new regulation and reverted to its 1970 position that the statutory term "salesman" referred only to an employee selling vehicles, not to those selling the servicing and maintenance of them. In doing so, the DOL stated it would not treat service advisors as exempt because "the statute does not include such positions and the Department recognizes that there are circumstances under which the requirements for the exemption would not be met."

9th Circuit Reversal

Concluding that Section 213(b)(10)(A) is ambiguous because the term "salesman" could or could not include service advisors, the 9th Circuit found the 2011 DOL regulation identified a narrow, specific exemption that applied to a salesman, partsman and/or mechanic, but not to service advisors. The 9th Circuit acknowledged that other courts had reached the opposite conclusion, citing Walton v. Greenbrier Ford Inc., 370 F.3d 446 (4th Cir. 2004), and Brennan v. Deel Motors Inc., 475 F.2d 1095 (5th Cir. 1973). Nonetheless, the 9th Circuit opinion, relying on Chevron U.S.A. Inc. v. Natural Resources Def. Council Inc., 467 U.S. 837, 842 (1984), examined through a two-step inquiry whether to defer to the 2011 DOL interpretation.

First, the court noted, the FLSA exemptions must be construed liberally in favor of employees and exemptions construed narrowly against employers. In step one, the decision determined that the statutory provision could be construed broadly or narrowly, and because whether Congress intended "salesman" to include any salesman involved in the servicing of cars or only those actually selling cars, the statute was ambiguous. The court's opinion found that an agency is permitted to change its position, citing FCC v. Fox Television Stations Inc., 556 U.S. 502 (2009), but implied that the change reflected that ambiguity. Using the Chevron test at step two, the court found that the DOL's interpretation that the exemption did not extend to service advisors was reasonable.

Supreme Court Disagrees

Making reference to the same legal standards, the Supreme Court reversed. It cited Section 213(b)(10)(A), which defines "salesman" to include one primarily engaged in selling or servicing. Chevron, it stated, does apply a two-part test, but presumes that when Congress grants an agency the authority to issue regulations interpreting a statute, it will use that authority to resolve ambiguities. However, deference is not accorded where the regulation is procedurally defective, and one requirement of administrative rulemaking is that "an agency must give adequate reasons for its decisions." And while an agency may change its existing position, it must show that it is aware that its position is changing and show that there are good reasons for it. An unexplained inconsistency is arbitrary and capricious and, by definition, unlawful.

Applying the Fox Television Stations test requiring "good reasons for the new policy," the Supreme Court found that the DOL "said almost nothing." According to the court, the DOL merely stated that Section 213(b)(10(A) does not include the service advisor position and there are circumstances when the exemption would not be met. Noting that the retail automobile and truck dealership industry has relied since 1978 on the DOL's position that service advisors are exempt (a point which the 9th Circuit misstated in its opinion), the Supreme Court found that the DOL's conclusory statements were inadequate explanations for the 2011 regulation and that the regulation deserves no Chevron deference. The court remanded the case to the 9th Circuit for proceedings consistent with its opinion.

Conclusions

The Supreme Court majority did not agree with Justices Clarence Thomas and Samuel Alito, dissenting, who proposed that reversal was warranted because the statutory language equating "service advisors" and "salesman" is unambiguous. A salesman can "be primarily engaged in servicing automobiles." Whether the 9th Circuit on remand agrees or takes a different tack remains to be seen. In the interim, service advisors' exempt status is preserved.

Service advisors in California who are paid on commission are subject to the 2002 Industrial Welfare Commission Wage Order No. 7, which requires that service advisors earn more than 50 percent of their compensation from sales commissions and must earn more than 1.5 times minimum wage for all hours worked.