Service advisors exempt from overtime rules

On Monday, the U.S. Supreme Court closed the door on federal overtime eligibility for service advisors in car dealerships. The Encino Motorcars, LLC v. Navarro, 2018 DJDAR 3005 (April 2, 2018), case has played-out in a back-and-forth between the 9th U.S. Circuit Court of Appeals and the Supreme Court over whether the blanket overtime exemption set forth Section 13(b)(10)(a) of the federal Fair Labor Standards Act covers service advisors. This provision exempts from federal overtime pay any "salesman, partsman or mechanic primarily engaged in selling or servicing automobiles."

In the first Navarro case in 2015, the 9th Circuit ruled that service advisors are outside the FLSA exemption, relying on the Obama Department of Labor's reversal of the agency's previous long-standing position that service advisors are covered by this overtime exemption. In 2016, the Supreme Court vacated that decision, finding that the 9th Circuit's reliance on the new DOL's position was not proper, and remanded the case.

In its second review of the case, the 9th Circuit once again found in favor of the service advisors based on its determination that service advisors do not sell or service vehicles under the language of Section 13(b)(10)(a). As this ruling conflicted with other circuit court and district court rulings, the Supreme Court once again granted review of this case and heard oral argument in January.

In the new decision, the Supreme Court rejected the 9th Circuit's position that a service advisor does not function as a "salesman, partsman or mechanic primarily engaged in selling or servicing automobiles." The court's opinion, authored by Justice Clarence Thomas and joined by Justices John Roberts, Samuel Alito, Neil Gorsuch and Anthony Kennedy, states that a service advisor is a "salesman" because service advisors sell services to customers, and that service advisors are also engaged in servicing automobiles because they are integral to the servicing process. Specifically, the court noted that a service advisor's active and essential participation in the automobile service process -- meeting customers, listening to concerns about the cars, suggesting and discussing repairs and maintenance, selling parts and accessories, recording the service orders, following-up with customers regarding the service work, explaining the service work when customers return for their vehicles -- qualified these employees as "primarily engaged in servicing automobiles," even though the service advisors are not actually performing the mechanical service work on vehicles. As such, the majority chose to interpret the statutory language in a disjunctive sense, i.e., applying the "selling or servicing" phrase to each of the salesman, partsman or mechanic job categories.

The dissent, which was authored by Justice Ruth Bader Ginsberg and joined by Justices Stephen Breyer, Elena Kagan and Sonia Sotomayor, argues that the majority's decision essentially creates a new category of exempt position that was not intended in the drafting of the FLSA provision. The dissent also applied the distributive approach to interpreting the statutory language, arguing that the term "salesman" in the statute only applies to the "selling" function, and not "servicing" as well, but that in any event, service advisors do not service vehicles as they are not performing the repairs/maintenance. The dissent also noted that, independent from the Section 13(b) exemption, employers may also avail themselves of the FLSA's Section 207(i) overtime exemption for any employee of a retail or service establishment whose pay is comprised of more than half in commissions, so long as the employee's "regular rate of pay" is more than 11/2 times the minimum wage.

The broader policy and political lines that can be inferred from the Supreme Court's decision are not surprising. Without a doubt the tension between the 9th Circuit's approach to this issue and that of the Supreme Court's more conservative palate (with the recent addition of Justice Gorsuch), mirrors the regional and philosophical divides that are playing out in many current national issues. And there is every indication that the current administration (including the DOL) will continue to ease up on the Obama administration's previous pro-employee agenda. In fact, the Encino Motorcars decision was a departure from some previous narrow interpretations of FLSA exemptions in favor of a "fair reading" of those exemptions. Indeed, Gorsuch asked at oral argument about the continuing validity of the canon of interpretation that exemptions to FLSA coverage should be narrowly construed.

Employers throughout the United States (except in more aggressively pro-employee states like California) should take note of the fact that the Supreme Court explicitly rejected the "narrow construction" doctrine, instead announcing that exemptions will be given a "fair reading." They may wish to review classification of employees who might be eligible for exempt status going forward. In any event, car dealerships across the nation who have been on pins and needles regarding this issue for years will be grateful to have resolution, although certain states including California have their own overtime pay requirements for dealership employees, including service advisors. As such, it is important for all employers to confirm whether any additional overtime pay obligations may exist.