Words, words, words: When is a salesman not a salesman?

August 1, 2016
Brinton M. Wilkins
Utah Employment Law Letter

In the classic Broadway musical My Fair Lady, Eliza Doolittle laments, “Words, words, words! I’m so sick of words.” You may have felt the same frustration working with lawyers who quibble about the contractual meaning of apparently simple words like “and,” “or,” “arising under,” or, heaven forbid, former President Bill Clinton’s favorite mind bender, “is.” But until we find a better way, laws are set down in words. And for those laws to have any uniform application, their actual meaning has to be understood. Unfortunately, some words are just plain ambiguous, rendering the law unclear.

There are many tools to help us resolve ambiguities. One of those tools is the power of government agencies to issue interpretive rules and regulations. The U.S. Department of Labor (DOL) has issued many rules to help employers make sense of the law. But even those efforts sometimes create confusion. Read on to see how the DOL created confusion and how, without actually defining the word, the U.S. Supreme Court helped resolve a dispute over the meaning of the word “salesman.”

A salesman’s a salesman, right?

Although the Fair Labor Standards Act (FLSA) generally requires overtime pay, Congress crafted a broad exemption from that requirement in 1966 for “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, trailers, trucks, farm implements, or aircraft” at a covered dealership. At the same time, Congress authorized the DOL to issue rules and regulations implementing and interpreting the exemption.

In 1970, the DOL issued rules that, among other things, defined the term “salesman.” The DOL’s rules were interpretive in nature, however, meaning they were merely intended to express the agency’s views on the exemption. Because they weren’t issued after a notice-and-comment procedure, they weren’t binding and didn’t have the force of law.

According to the DOL’s 1970 rules, a “salesman” was someone who “is employed for the purpose of and is primarily engaged in making sales or obtaining orders or contracts for sale of the vehicles or farm implements which the establishment is primarily engaged in selling.” The definition excluded service advisers, whose primary job is to sell maintenance and repair services, not vehicles. Thus, according to the DOL’s interpretive rules, service advisers had to be paid overtime, while employees who actually sold the vehicles did not.

Contrary to the DOL’s interpretive rules, several U.S. circuit courts determined in the early 1970s that the overtime exemption applied to service advisers. Furthermore, while that question was playing out in the courts, Congress waded back into the fray and amended the exemption to apply to “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, trucks, or farm implements” at a covered dealership.

Despite that change, the DOL continued to issue rules and regulations that were only interpretive in nature and didn’t have the effect of law. Importantly, in 1978, the DOL issued an opinion letter reversing its earlier position and stating that the overtime exemption covered service advisers. In other words, the agency was of the opinion that service advisers didn’t have to be paid overtime.

Fast-forward to 2008, when the DOL finally decided to begin the notice-and-comment process necessary to make regulations for the sales employee overtime exemption that have the force of law. In its notice regarding the anticipated rules, the DOL stated that the new regulations would accord with its practice over the last 30 years—i.e., the exemption would cover service advisers.

But lo and behold, the new rules that were actually promulgated in 2011 reversed 30 years of practice and returned to the DOL’s 1970 interpretation that service advisers are not “salesmen” under the FLSA and therefore aren’t exempt and must be paid overtime
wages.

We’re not salesmen—we’re service advisers

After the DOL’s 2011 about-face, service advisers at a Los Angeles Mercedes-Benz dealership sued their employer for failing to pay them overtime wages. The dealership argued that the FLSA’s overtime requirements don’t apply to service advisers who sell vehicle maintenance and service contracts, rather than the underlying vehicles, at covered automobile dealerships. Although the trial court originally tossed out the complaint, the U.S. 9th Circuit Court of Appeals reversed that decision.

According to the 9th Circuit, the DOL’s 2011 rules had to be respected. Normally, when Congress authorizes an agency to promulgate regulations interpreting a statute, courts will give deference to the regulations and enforce them if the statute they interpret is ambiguous and the agency’s interpretation of the statute is reasonable. Despite the DOL’s dramatic change in position, the 9th
Circuit applied that test to the 2011 rule and decided the agency’s interpretation controlled.

The case eventually worked its way to the U.S. Supreme Court, which agreed to hear the case to resolve a disagreement among the courts. The Supreme Court didn’t agree with the 9th Circuit’s decision.

Supreme Court resolves the dispute but doesn’t answer the question

The Supreme Court agreed with the 9th Circuit’s analysis in general but clarified that a regulation isn’t owed deference if the agency that issued it didn’t follow the correct procedures in promulgating it. Indeed, according to the Supreme Court, “whe[n] a proper challenge is raised to the agency procedures, and those procedures are defective, a court should not accord . . .deference to the agency interpretation” of the statute.

The Supreme Court found that the DOL’s 2011 rule was defective because the agency didn’t give adequate reasons for its decision. Although agencies can change their policies, they must provide reasoned explanations for doing so. The Court stated that if an agency changes a long-established policy—one on which people
have relied—“a reasoned explanation is needed for disregarding facts and circumstances that underlay or were engendered by the prior policy.”

In issuing the 2011 rule, the DOL merely stated that it had “considered all of the comments, analyses, and arguments made for and against the proposed changes” and had decided that the new interpretation of the rule was reasonable. There was no further explanation for its change in position. For instance, noted the Court, the “department did not analyze or explain why the [FLSA] should be interpreted to exempt dealership employees who sell vehicles but not dealership employees who sell services” when the statute speaks only of “salesmen.”

Accordingly, the Supreme Court reversed the 9th Circuit’s decision and sent the case back for the court to interpret what the statutory exemption to the FLSA’s overtime requirement for salesmen actually covers. Encino Motorcars, LLC v. Navarro, 2016 WL 3369424 (U.S.
2016).

Lessons learned

A cynic might look at the Supreme Court’s decision and wonder what immediate good the Court actually did. After all, even though it decided that the DOL’s 2011 rule didn’t control, the Court didn’t determine whether the overtime exemption actually covers service advisers. Instead, the Court punted on the issue and directed the
9th Circuit to try to figure it out.

And if you’re one of those cynics, you’re not alone: Justices Clarence Thomas and Samuel Alito expressed the same concern and wrote a dissenting opinion in which they stated that they agreed that the 2011 rule didn’t control and then went further to find that the exemption
covers service advisers. Unfortunately, because only two—and not five—justices agreed on this point, the dissenting opinion may be enlightening, but it isn’t law.

But this decision is still worthwhile even though the Court didn’t actually clarify whether a service adviser is a “salesman” for purposes of the overtime exemption. If you are subject to federal regulations, you can take comfort in the knowledge that federal agencies cannot change their regulations willy-nilly. Policy changes
must be supported by reasoned explanations, particularly when they involve ambiguous laws. That’s especially true if a policy that’s being changed has existed for a long time.

Nevertheless, you should be aware that the required “reasoned explanations” may not always be extensive or as detailed as you would like. As a result, you would be well-advised to stay abreast of proposed changes in employment regulations and become actively involved in the rulemaking process if necessary.

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