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Ruling on overtime exemption for dealership service advisors may have broader consequences

April Boyer is a partner in K&L Gates’ Miami office.
April Boyer is a partner in K&L Gates’ Miami office.

According to industry statistics nearly 100,000 Floridians are employed in the automobile or boat retail sales industries. Many are employed by dealerships here in South Florida. In addition to sales persons and mechanics, local dealerships often employ service advisors or service writers who sell the dealership’s repair and maintenance services to customers. Whether these employees could properly be classified as exempt from the Fair Labor Standards Act’s overtime requirements was a matter of some debate in recent years.

In April, the U.S. Supreme Court provided a definitive answer to that question, ruling that car dealership service advisers are “salesm[e]n . . . primarily engaged in . . . servicing automobiles,” and therefore need not be paid overtime under the FLSA. In Encino Motorcars v. Navarro, a five Justice majority examined the FLSA’s overtime exemption for car dealership employees for the second time in two years. Interpretation of the exemption, created by Congress in 1961, has fluctuated dramatically in the past 50 years. Initially, Congress exempted all dealership employees. Five years later however Congress limited the exception to “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles” employed by automobile retailers.

Dealership service advisors who sell services provided directly by others did not fit neatly within these categories. As such, the Department of Labor originally took the position that service advisors were not exempt and must be paid overtime for any hours worked over 40 in a workweek. However, in the face of disagreement from the federal courts, the DOL changed course in 1978, issuing a formal opinion letter finding service advisors exempt from overtime. Fast-forward to 2011, and the DOL again reversed its interpretation and issued formal regulations defining “salesman” to exclude service advisors who sell repair and maintenance services rather than the cars themselves.

In Encino, five service advisors at a Mercedes Benz dealership in California sued to recover unpaid overtime, alleging they were required to work 55 hours per week and were not paid overtime. The district court dismissed the case finding that auto sales employees were exempt from overtime pay requirements. The Ninth Circuit reversed, holding that the 2011 DOL regulation was entitled to deference. In 2016 in the first of two opinions, the U.S. Supreme Court reversed the appeals court finding that the regulation was not entitled to deference as the DOL failed to justify its 180-degree shift in interpretation. The Supreme Court sent the case back to the 9th Circuit to assess the exempt-status of service advisors based upon the statutory text. The 9th Circuit reiterated its prior holding that the service advisors were entitled to overtime.

The case returned to the Supreme Court, which has now provided a definitive ruling in favor of the dealership. The Supreme Court reasoned that service advisors engage in selling services. According to the majority, this makes them salesmen in the “ordinary meaning” of the word. Additionally, the majority examined the specific tasks performed by service advisors and determined they “are integral to the servicing process.” The majority acknowledged that “service advisors do not spend most of their time physically repairing automobiles,” but emphasized that the same is true of partsmen (who are also exempt from overtime). The majority reasoned that the inclusion of partsmen in the statute means that “the phrase ‘primarily engaged in … servicing automobiles’ must include some individuals who do not physically repair automobiles but are nonetheless integrally involved in the servicing process.”

This decision, although focused on retail car dealerships, is likely to have far broader consequences. In its opinion, the Supreme Court rejected the longstanding principle that FLSA exemptions should be construed narrowly. Instead, the Supreme Court stated that the FLSA’s statutory exemptions should be interpreted according to their fair reading. At a minimum, this holding sends a message that the Supreme Court could hamper DOL’s future regulatory and enforcement efforts. Overall, this opinion suggests that employers across all industries can expect potentially expanded interpretations of other FLSA exemptions in the future and makes clear those decisions will be made in a more hospitable Supreme Court.

South Florida employers, especially those in the vehicle retail industry, should use this opportunity to conduct a regular audit of their FLSA exemption classifications and ensure that all employees are properly classified.

April Boyer is a partner and Yamilet Hurtado is an associate in K&L Gates’ Miami office, where they counsel and represent employers in connection with the firm’s Labor, Employment & Workplace Safety practice.