Justices weigh overtime rules

OCTOBER 2017 TERM

On Wednesday, the nation's highest court heard oral argument for its second review of Encino Motorcars, LLC v. Navarro, 161362. (See below for transcript.) This case arises over a specific and narrow job classification under the Fair Labor Standards Act, but the decision may send a broader signal as to whether the Trump administration and the new conservative-leaning Supreme Court will follow prior doctrine of construing federal overtime exemptions narrowly against employers.

The FLSA identifies job categories that are exempt from the usual obligation to pay overtime after 40 hours per week, including "any salesman, partsman or mechanic primarily engaged in selling or servicing automobiles" at a car dealership. 29 U.S.C. Section 213(b)(10)(A) (also referred to as the FLSA Section 13(b)(10)(A) exemption). Since 1978, the Department of Labor had taken (and reaffirmed) the position that service advisors are exempt.

The Obama Labor Department in 2011 issued a new regulation reversing this position. When the Supreme Court first reviewed Navarro in 2016, the Labor Department submitted an amicus brief against applying this overtime exemption to service advisors, consistent with its 2011 regulations. During the court's second review, the Trump Labor Department did not submit a brief, perhaps signaling through its silence its rejection of the Obama standard.

Background

Service advisors at Encino Motorcars, a California car dealership, intake customer vehicles arriving for service work, prepare repair order paperwork, recommend and sell service repair and maintenance work, communicate with customers regarding work performed, close out repair paperwork, and facilitate return of customers' vehicles. In other words, work contemplated by the FLSA Section 13(b)(10)(A) exemption.

Dealerships nationwide rely on this exemption in classifying salespersons, mechanics, parts counterpersons and service advisors as exempt from overtime, except where state laws conflict. Encino Motorcars' service advisors sued for unpaid overtime, claiming this exemption did not cover them as it did not refer to service advisors by title, nor did service advisor functions fall within the description: "salesman, partsman or mechanic primarily engaged in selling or servicing automobiles."

In 2015, the 9th U.S. Circuit Court of Appeals sided with the service advisors, finding them nonexempt, based on the 2011 Obama Labor Department regulations "reasonably interpret[ing] the statutory exemption not to encompass service advisors." The Supreme Court vacated that decision in 2016, finding the 9th Circuit erred in giving deference to the Labor Department regulation because the department didn't provide adequate reason for its interpretation, especially as it contradicted its own prior position, on which dealerships had relied. It remanded for reconsideration based on its own analysis of the FLSA exemption.

On remand, the 9th Circuit analyzed the FLSA provision anew, finding the service advisors nonexempt because they neither sell, nor service, vehicles and the legislative intent did not indicate an intent to include service advisors within the exemption. The ruling's conflict with published decisions of the 4th and 5th Circuits, several district courts, and the Supreme Court of Montana, prompted the U.S. Supreme Court to grant review again.

Supreme Court Review, Part 2

The Supreme Court's analysis will likely focus on the provision's actual language of, to wit, what exactly "salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles" means, and whether "salesman" is restricted only to those employees who sell vehicles, or includes employees who sell service work as well. Justice Clarence Thomas' dissent to the Supreme Court's first review of Navarro examined this issue and concluded service advisors are exempt. Another factor will be the degree to which the court applies FLSA precedent that overtime exemptions are to be narrowly construed against employers.

Presumably, the Labor Department already has changed its position on this issue, and this conservative leaning court will broaden its interpretation of pro-employer FLSA exemption-creating regulations. While it is too soon to predict Justice Neil Gorsuch's views on the issues presented in Navarro, his record of (1) little deference to government agency positions, and (2) pro-employer decisions, suggest he'll vote with the Thomas-Alito position to find an exemption. Assuming Chief Justice John Roberts and Justice Anthony Kennedy follow the conservatives' lead (which is not assured for Justice Kennedy although he did draft the opinion in Navarro I), the decision, along with the Trump Labor Department's pro-business approach, will likely undo the Obama Labor Department's 2011 position on Section 13(b)(10)(A). This case may be a bellwether for how the current administration and the high court will handle other employment issues, such as the Labor Department's 2016 rule raising the minimum salary requirements for the federal white-collar exemptions, which was invalidated by a district court and which the 5th Circuit is holding in abeyance at the administration's request while the Labor Department works on further rulemaking on the salary requirements.

Practical Effect

Apart from the micro-analysis of syntax and phrasing that likely will animate the Supreme Court's decision, treating service advisors (who generally earn commissions off of sales or profit of service work sold) differently from car salespersons, parts counterpersons and mechanics (who are also generally compensated off of sales) does not make sense. Of these job categories, service advisors generally earn the highest average level of compensation, and therefore are the least in need of the protections of overtime laws. In fact, all of these positions are predominantly paid off production (whether commission or piece-rate pay), giving employees the opportunity to substantially increase their earnings by working more hours. There is no evidence they are asking to be protected from "having to" work more hours. Without the overtime exemption, employers are penalized for offering overtime hours to those employees, particularly in California. This is a lose-lose situation. Statutory language aside, there is no good economic reason to exclude service advisors from the job categories listed in FLSA Section 13(b)(10)(A).

Although Navarro will have a big impact on car dealerships nationwide who rely on this overtime exemption in paying their service advisors, dealers can rely on another exemption not addressed in this case. 29 U.S.C. Section 207(i) (referred to as the FLSA Section 7(i) exemption) applies to employees of retail or service establishments who: (1) are paid under a bona fide commission pay plan, (2) receive more than 50 percent of their earnings in commissions; and (3) whose regular hourly rate of pay for each overtime workweek is more than 1.5 times the FLSA minimum wage. Justice Ruth Bader Ginsburg also anticipated this alternative exemption in her concurring opinion in Navarro I, noting this decision may not have so big an impact on dealerships.

Navarro will have less impact on California dealerships, who must already conform to Industrial Wage Order 7's requirements in order to treat commissioned service advisors (and other commission-paid employees selling products or services) as exempt from overtime under California law. Generally, if a dealership is in full compliance with California's sales exemption requirements, it also complies with the Section 7(i) exemption. The Supreme Court decision should have no effect on California auto dealerships already in compliance with California's Wage Order 7.

Car dealerships who do rely exclusively on the FLSA Section 13(b)(10)(A) exemption are eagerly anticipating the pending Supreme Court review. But they should also consider availing themselves of the Section 7(i) exemption as an alternative.

Hope remains that the high court will finally provide decisive direction for dealerships who have been in limbo on this issue for too long.