High court rejects narrow interpretation of FLSA exemption

WAGE AND HOUR LAW

May 2018
Ryan B. Frazier
Utah Employment Law Letter

As most of you know, the Fair Labor Standards Act (FLSA) generally requires employers involved in commerce to pay covered employees overtime for all hours over 40 they work during a workweek. The overtime rate must be at least 1½ times the employee’s regular rate of pay. However, there are certain recognized exemptions to the FLSA’s overtime requirements.

For decades, those exemptions have been narrowly construed to require the payment of overtime to more employees. The U.S. Supreme Court recently rejected that interpretation in determining whether service advisers at an automobile dealership were exempt from the FLSA. Read on to find out why the Court rejected a decades-old interpretive tool and what the ruling may mean for employers going forward.

Service advisers under the FLSA

One of the statutory exemptions from the FLSA’s overtime requirements covers “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles.” Initially, that language was understood to include service advisers, but in 1978, the U.S. Department of Labor (DOL) issued an opinion in which it deemed service advisers exempt in most cases.

Then, in 2011, the DOL reversed course, promulgating a new rule that excluded service advisers from the auto dealership exemption. Thus, according to the 2011 rule, service advisers were not viewed as exempt from overtime. The federal courts, however, generally rejected the DOL’s interpretation.

California service advisers’ overtime dispute

Encino Motorcars, LLC, is a Mercedes-Benz dealership in California. In 2012, certain former and current service advisers sued Encino, claiming it violated the FLSA by failing to pay them overtime. They relied on the DOL’s 2011 rule, arguing the rule made it clear that they were entitled to overtime. The service advis­ers sought back pay for the overtime they claimed they were owed.

Encino filed a request to have the lawsuit dismissed, arguing service advisers are exempt from the FLSA’s overtime requirements. Specifically, Encino asserted that the service advisers fall within the exemption for “any salesman, partsman or mechanic primarily en­gaged in selling or servicing automobiles.” The district court agreed with Encino and dismissed the lawsuit.

The service advisers appealed to the U.S. 9th Cir­cuit Court of Appeals, which reversed the dismissal of their case. The 9th Circuit determined that the FLSA is ambiguous on the auto dealership exemption and the legislative history of the Act is inconclusive. The court of appeals therefore deferred to the DOL’s 2011 rule ex­cluding service advisers from the auto dealership ex­emption. Encino appealed to the U.S. Supreme Court.

The Supreme Court overturned the 9th Circuit’s decision, finding the appellate court shouldn’t have de­ferred to the DOL’s interpretation because the 2011 rule was procedurally defective. However, the Court didn’t decide whether the statutory exemption covers service advisers without relying on the 2011 rule.

The case was sent back to the 9th Circuit with in­structions that it review the case again without giving consideration to the 2011 rule. Although it acknowl­edged that service advisers are “salesmen” in the ge­neric sense and are primarily engaged in servicing au­tomobiles, the appellate court again ruled that service advisers aren’t exempt from the overtime rules.

The 9th Circuit concluded that Congress didn’t intend to exempt service advisers from overtime, sup­porting that interpretation by noting that exemptions are to be construed narrowly and the FLSA doesn’t spe­cifically mention service advisers.

Encino again appealed to the Supreme Court, and the parties presented their cases to the Court in Janu­ary 2018. The Supreme Court overruled the 9th Cir­cuit again.

Supreme Court’s ruling

This time, in a 5-4 decision, the Court ruled that automobile dealership service advisers are exempt from the FLSA’s overtime requirements. The Court concluded that under the best reading of the statu­tory language, service advisers are “salesmen” and that they are “primarily engaged in . . . servicing of automobiles.”

After noting that “salesman” isn’t defined in the statutory scheme, the Court attempted to give the term its ordinary meaning of someone who sells goods or services. Service advisers, it concluded, fall within that general definition because they sell customers services for their vehicles. The Court also determined that ser­vice advisers are “primarily engaged in . . . servicing automobiles” because they are integral to the service process by selling parts and services for the repair and maintenance of vehicles.

The Court explained that the practice of constru­ing FLSA exemptions narrowly and the Act’s legislative history didn’t persuade it that its interpretation of the statute was incorrect. Although the 9th Circuit relied on the principle of narrow construction, the Court didn’t feel constrained by that principle. Indeed, and perhaps most important in this case, the Court rejected a narrow interpretation of the exemptions “as a useful guidepost for interpreting the FLSA.” Noting that the statutory lan­guage gives no indication that the exemptions are to be narrowly construed, the Court explained that there’s no reason to give them more than a “fair” interpretation.

The Court also concluded that the legislative history doesn’t support any interpretation other than service ad­visers being exempt from the FLSA requirements. The Court reiterated that because the legislative history isn’t conclusive, its plain language interpretation is the best read of the statute. Accordingly, the Court concluded that service advisers are exempt from the FLSA over­time requirements. Encino Motorcars, LLC v. Navarro, No. 16-1362 (U.S. Sup. Ct., Apr. 2, 2018).

Lessons learned

This decision unambiguously resolves the question of whether service advisers at automobile dealerships are exempt from overtime. But all employers should take note of this case. Although the specific holding regard­ing service advisers may not be applicable to your orga­nization, the Supreme Court’s rejection of the practice of narrowly construing FLSA exemptions will have an im­pact on when employees may be deemed exempt from the law’s minimum wage and overtime requirements.

That doesn’t mean you can forgo an analysis of whether employees in a particular position are exempt from overtime under one of the recognized FLSA ex­emptions. However, because exemptions will no longer be narrowly construed, the likelihood that a job will be considered exempt has increased.

You can contact the author at rfrazier@kmclaw.com or 801-323-5933.

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