US Supreme Court Orders 9th Circuit to Reconsider Service Advisor Overtime Exemption

SCOTUS issued its Order with direction to avoid taking the US Department of Labor’s most recent regulations into account, finding the regulations were issued without adequate explanation.

The case, Navarro v. Encino Motorcars, LLC, involves claims of four Service Advisors who sued Encino Motorcars (a dealership that sells and services new and used Mercedes-Benz vehicles) in 2012 for violations of the FLSA. Plaintiffs asserted that the defendant violated the FLSA by failing to pay them overtime, notwithstanding their “sales commission” employee status. The District Court dismissed the overtime claims on the ground that, as Service Advisors, they fell within the FLSA’s exemption for dealership “salesmen”, selling car service rather than cars, but salesmen nevertheless. The FLSA exempts “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles.” (29 US.C. §213(b)(10)(A).)

On appeal, the Ninth Circuit disagreed with the trial court’s ruling, relying on a ruling issued by the Department of Labor in 2011, which limit the DOL’s regulatory definition of “salesmen, partsmen, and mechanic” to salesmen who sell vehicles and partsmen and mechanics who service vehicles. Because Service Advisors neither sell vehicles nor service them, but sell services, the Ninth Circuit concluded that Service Advisors were not exempt from the FLSA’s overtime requirements.

SCOTUS reviewed the Ninth Circuit’s decision because it was at odds with a Fifth Circuit decision from 1973, a more recent Fourth Circuit decision from 2004, and a handful of federal district courts, in addition to the Montana Supreme Court, which have all expressly interpreted the FLSA’s dealership exemption to extend to Service Advisors.  

The 2011 DOL rule the Ninth Circuit relied marked a departure from the Department’s previous position that Service Advisors were exempt from overtime under the FLSA.  The rule is also inconsistent with the Notice of Proposed Rulemaking issued by the DOL in 2008 (which proposed to revise the regulations to reflect that Service Advisors should be exempt based on that all prior court decisions recognized Service Advisors as exempt and because the DOL had itself treated Service Advisors as exempt since at least 1987). This change would have also been consistent with an opinion letter issued by the DOL in 1978 recognizing Service Advisors as exempt under §213(b)(10)(a), a departure from its original 1970 interpretation that the term “salesmen” excluded Service Advisors because they were not “primarily engaged in making sales or obtain orders or contracts for sale” of vehicles or farm implements.”

On Monday, the Supreme Court vacated the Ninth Circuit’s decision that Service Advisors should receive overtime compensation under federal law. The SCOTUS explained that Section 213(b)(10)(A) of the FLSA must be construed without placing controlling weight on the DOL’s 2011 regulation because the “unavoidable conclusion is that the 2011 regulation was issued without the reasoned explanation that was required in light of the Department’s change in position and the significant reliance interests involved.”

Because the 2011 regulations were issued without adequate explanation for DOL’s deviation from its prior position, the Supreme Court held that the Ninth Circuit should not have presumed them to be reasonable under the Chevron standard, which gives deference to agency regulations if a statute is ambiguous and the agency’s interpretation is reasonable.

Justice Kennedy, writing for the majority, recognized that “[r]equiring dealerships to adapt to the department’s new position could necessitate systemic, significant changes to the dealerships’ compensation arrangements,” and that as a result, “the department needed a more reasoned explanation for its decision to depart from its existing enforcement policy.” The Supreme Court remanded the case to the Ninth Circuit to interpret the statute without giving deferential weight to the 2011 regulation. 

Justice Thomas, joined by Justice Alito, declined to join in the majority decision to leave it “for the Court of Appeals to interpret the statute in the first instance,” indicating that while he agreed with the majority that the Court should not give deference to the DOL’s position, he believed that the Supreme Court should not “punt on the issue before it,” stating that the Supreme Court has an “obligation … to decide the merits of the question presented.”

In addressing the issue squarely, Justice Thomas wrote in his dissenting opinion, “I would hold that the FLSA exemption set out in §213(b)(10)(A) covers the service advisors in this case. Service advisors are “primarily engaged in … servicing automobiles,” given their integral role in selling and providing vehicle services. Accordingly, I would reverse the judgment of the Ninth Circuit.”

Justices Ginsburg and Sotomayor, on the other hand, issued a concurring opinion, agreeing with the majority that “the Department of Labor did not satisfy its basic obligation” to explain the shift in the Department’s policy based on the DOL’s 2011 rule, but stopped short of agreeing with the dissent that absent the deference accorded by Chevron, that Service Advisors should be categorially exempt from the overtime requirements of the FLSA.

While it remains to be seen what the Ninth Circuit will ultimately decide, it should be noted that under state law, including California, certain requirements must be meet before Service Advisors can be exempt from overtime. Specifically, under California law, Service Advisors must meet the requirements of Wage Order 7 to be exempt from overtime compensation, which requires that more than half of their earnings must come from sales commissions and they must earn more than 1.5 times minimum wage for all hours worked. Also, at least one California case has also interpreted the Wage Order as requiring Service Advisors to be principally engaged in selling for the exemption to apply. Therefore, regardless of the Ninth Circuit’s ruling, California Service Advisors who meet these requirements are exempt from overtime compensation and California compliant compensation agreements that are based on these requirements will be unaffected by the court’s decision.

In other states, the continued uncertainty resulting from the Supreme Court’s failure to address this issue head on will likely create angst for employers for the immediate future. Nevertheless, this would be a good time for employers, especially those in the automotive industry, to ensure that their employee pay plans for hourly and commission employees are carefully drafted, as those plans are under the constant scrutiny of the courts and a very active plaintiffs’ bar. It is also wise to have your pay plans regularly reviewed by your counsel to ensure that they continue to comply with evolving laws.