Encino: Deference challenged & ‘fair’ is back

THIS COLUMN APPEARED IN THE 2018 LABOR AND EMPLOYMENT SUPPLEMENT

On April 2 after two trips to the high court, the U.S. Supreme Court delivered automobile dealerships a decisive win in Encino Motorcars v. Navarro, holding service advisors exempt from the Fair Labor Standards Act's overtime-pay requirement. 2018 DJDAR 3005. The court agreed with the dealership that service advisors are exempt under 29 U.S.C. Section 213(b)(10)(A) because they are "salesm[en] ... primarily engaged in ... servicing automobiles."

After the 9th U.S. Circuit Court of Appeals twice rejected the dealership's position, the Supreme Court finally ratified decades of established pay practices for the approximately 100,000 service advisors employed at dealerships throughout the United States. But legacies of Encino I and Encino II will likely reverberate widely outside the automobile dealership and labor and employment contexts in the coming years.

Encino I: Agency Rule Making Must Be Reasonably Explained

In Encino I, the dealership secured an important victory regarding the Department of Labor's interpretation of the exemption. Even though the term "service advisor" does not appear in the statutory exemption, for decades the DOL's interpretive guidance aligned with numerous lower courts, with all agreeing that services advisors were exempt as salesmen selling services. But in 2011, the DOL drastically departed from decades of uninterrupted case authority and accepted industry practice, claiming that service advisors were not exempt. It was the DOL's about-face that provided plaintiffs in Encino I the platform to sue the dealership, for over-time wages and penalties.

On its first trip to the 9th Circuit, the panel described the agency's 2011 new interpretation departing from the long-standing "exempt" status quo as "rationally explained" and showing "considerable thought" on the agency's part. Not so. Because of the industry's reliance on the interpretation exempting services advisors since 1978, the court admonished the agency it "needed a more reasoned explanation for its decision to depart from its existing enforcement policy." Instead of "rationally explained," the Supreme Court found the DOL "said almost nothing" showing either analysis or explanation of why the exemption should apply to "dealership employees who sell vehicles but not dealership employees who sell services." Reversing 6-2, the Supreme Court found the DOL's changed interpretation did not "carry the force of law," could not receive Chevron deference, and remanded for the 9th Circuit to interpret the language of Section 213(b)(10)(A), with no reference to the DOL's interpretation.

Encino I's harsh critique of the DOL's haphazard and unexplained rule change has opened a new line of challenges to agency rule changes. Federal district and appellate courts are citing Encino I to question not just the DOL's rule making but any federal agency's interpretive rulemaking and determine the deference (or lack thereof) to be afforded. On June 12, the 9th Circuit reversed and remanded the Board of Immigration Appeal in Gomez-Sanchez v. Sessions (2018 DJDAR 5629), finding that a petitioner's mental health could be considered when determining whether he committed a particularly serious crime. Citing Encino I, the 9th Circuit found the BIA's "blanket rule" prohibiting consideration of the petitioner's mental health to be "contrary to Congress' clearly expressed intent." It held the BIA's interpretation was both unreasonable and not entitled to Chevron deference because "the Board made no attempt to address the apparent inconsistencies between its earlier rule and the rule at issue here."

Similarly, in National Association for the Advancement of Colored People v. Trump, 298 F.Supp.3d 209, 238-40 (D.D.C. 2018), the district court relied heavily on Encino I, when it found Department of Homeland Security's Rescission Memo of the Deferred Action for Childhood Arrivals contained "scant legal reasoning" and failed to "to satisfy the Department's obligation to explain its departure from its prior stated view that DACA was lawful." Doubling-down on the Supreme Court's directive to agencies in Encino I, the district court criticized DHS because its "failure to give an adequate explanation of its legal judgment was particularly egregious here in light of the reliance interests involved" with a program in place for five years and DACA recipients who structured their education, employment, and life activities on the expectation of renewing their DACA benefits. The court concluded that DHS's "barebones legal interpretation" could not support rescission of DACA.

The Anti-Employer Canon Is off the Table

In Encino II, the Supreme Court not only reversed, finding service advisors exempt but also accepted the dealership's invitation to decisively retire the oft-invoked "FLSA canon," which calls for interpreting the statute's exemptions "narrowly." Mitchell v. Ky. Fin. Co., 359 U.S. 290, 295 (1959). The dealership noted the 9th Circuit used the "rule that the exemptions in §213 of the FLSA 'are to be narrowly construed against the employers seeking to assert them" to bolster its erroneous construction of the statute, finding service advisors nonexempt.

The dealership reminded the Supreme Court that it had essentially abandoned this weighted anti-employer analysis for decades. See, e.g., Sandifer v. U.S. Steel, 134 S. Ct. 870, 879 n.7 (2014) (reserving question of whether court should "disapprove" anti-employer canon); Christopher v. Smithkline Beecham Corp., 132 S. Ct. 2156, 2172 n.21 (canon does not apply to FLSA's definitions in Section 203). Even though the Supreme Court no longer applied this analysis, the dealership pointed to the 9th Circuit as a continuing example of lower courts behaving as if "bound" to the canon and invited the Supreme Court to instruct lower courts and explicitly "reaffirm that FLSA exemptions, like all statutory language, should be interpreted neither narrowly nor broadly, but fairly and correctly in accord with their plain meaning." Pet. Br. 48-50.

The Supreme Court took the opportunity to clarify the retirement of the anti-employer FLSA canon, noting that the FLSA does not suggest it should be construed restrictively against employers and announcing the "narrow-construction principle relied on the flawed premise that the FLSA 'pursues' its remedial purposes at 'all costs.'" Finally, the court clarified that courts are to read FLSA exemptions not narrowly but fairly.

Placing "fair" back into the FLSA exemption analysis, the Supreme Court's rejection of the anti-employer canon means that the judicial thumb is off the scale. District courts across the country are acknowledging and applying the shift away from the historically narrow construction skewed against employers, explicitly rejected by Supreme Court in favor of a "fair reading" of the FLSA exemptions. See Hicks v. Great Lakes Home Health Services, 2018 WL 2363959 (E.D. Mich. May 24, 2018); Rodriguez v. Adams Restaurant Group, 2018 WL 1936001 (D.D.C. April 23, 2018); Roshon v. Eagle Research Group, 2018 WL 2416573 (S.D. Ohio May 29, 2018); Buford v. Superior Energy Services, 2018 WL 2465469 (E.D. Ark. June 1, 2018). For dealerships, Encino II corrected what up to 2011 had been a settled area of law: Services advisors are exempt from the FLSA's overtime requirements. But for all employers, Encino II rebalanced the scale used to interpret FLSA exemptions, placing fairness at the forefront of the analysis.

NOTE: All three authors defended Encino Motorcars in the case before the Supreme Court.