Be cautious in response to service advisor ruling

On April 2, the U.S. Supreme Court ruled that service advisors at car dealerships are exempt under the federal Fair Labor Standards Act. Encino Motorcars, LLC v. Nararro, 2018 DJDAR 3005. Dealers in California, however, should consider the risks and seek legal advice before concluding that the decision is the final word.

Under Section 213(b)(10)(A) of the FLSA, overtime pay requirements do not apply to any salesman engaged in selling or servicing automobiles if his employer is engaged in the business of selling vehicles to ultimate purchasers. Between 1978 and 2011, consistent with several federal court decisions, the Department of Labor interpreted this language to mean that service advisors were exempt from overtime pay. But in 2011, the DOL reversed course, finding the term "salesman" to exclude service advisors.

Relying on the DOL's 2011 finding, in 2012 service advisors sued their dealership seeking overtime pay. Encino Motorcars rejected the DOL's last interpretation and contended that, under the FLSA, service advisors interact with customers and sell them services for their vehicles. The dealer noted that service advisors meet customers, hear their concerns, suggest repairs and maintenance services, sell new accessories or replacement parts; record service orders, follow up as services are performed, and explain repairs and maintenance work when customers pick up their cars.

The 9th U.S. Circuit Court of Appeals, citing the principle that exemptions to the FLSA be construed narrowly and the absence of any reference to service advisors in the legislative history, concluded that Congress did not intend to exempt service advisors. It identified service advisors as "salesmen" and associated them only selling, rather than servicing.

The U.S. Supreme Court by a 5-4 vote reversed. Relying in part on a text by the late Justice Antonin Scalia, the court rejected generally the narrow approach to interpreting the FLSA in favor of a reading that is "fair." Reciting Encino Motorcars' list of tasks performed, the court determined that a service advisor is obviously a salesman, that is, a man who sells goods and services. After engaging in a sophisticated analysis of grammar and syntax to assess whether a service advisor is engaged in selling or servicing, the court found that the exemption covers a service advisor primarily engaged in either. Returning its focus on the language of Section 213(b)(10)(A), the court concluded that an advisor is a "salesman ... primarily engaged in ... servicing automobiles."

While dealers across the country may breathe a sigh of relief, dealers in California should be cautious in considering whether to reclassify or treat service advisors as exempt. First, the FLSA does not preempt California wage laws. This was most recently illustrated in the California Supreme Court decision in Alvarado v. Dart Container Corporation of California, 2018 DJDAR 2083 (March 5, 2018), where the court ruled that when an employer pays a flat rate bonus, the regular rate of pay is determined by dividing the amount of the bonus by the total number of nonovertime hours worked during the relevant pay period and using 1.5 as the multiplier for determining the employee's overtime rate.

By contrast, under the FLSA, the calculation uses all hours, including overtime hours, work, and the multiplier is 0.5. Moreover, the court announced that state policy discourages overtime in excess of eight hours per day and 40 hours in a six-day workweek, an interpretation that "discourages employers from imposing overtime work."

Second, California courts do not follow the "primarily engaged" test found in the FLSA. Rejecting that standard in favor of a quantitive test, the California Supreme Court in Ramirez v. Yosemite Water Co., 20 Cal. 4th 785 (1999), ruled that a California employer claiming that an employee is exempt must demonstrate that the individual spends more than 50 percent of his time performing exempt tasks. Whether the tasks identified by Encino Motorcars in defending its position occupy more than 50 percent of service advisors' time at a dealership, as opposed to time spent directing service technicians or their supervisors, completing warranty paperwork for the manufacturer, and other tasks unrelated to credited by the Court, is fact specific to each dealership and invites a time study analysis.

Third, California courts have held that when California wage laws diverge from the minimal FLSA standards and state law is more favorable to employees, state law prevails. Mendoza v. Nordstrom, Inc., 2 Cal. 5th 1074 (2017); Tidewater Marine Western, Inc. v. Bradshaw, 14 Cal. 4th 557 (1996). Payment of overtime to service advisors may be more favorable to them in some cases, and when faced with those factual circumstances California courts would be more likely inclined than not to determine that a service advisor is non-exempt under state law.

Finally, employees in California aggressively pursue perceived rights in court, unfazed by existing precedent, often proposing novel theories of recovery. Controlling the overtime hours worked by service advisors, who often stay late to meet customers, may be difficult. As a practical consequence, a dealer must carefully weigh the risks of liability and damages as well as the costs of defense in deciding whether to classify service advisors as exempt.