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Auto Dealership Service Advisors are Exempt and FLSA Exemptions Need Not Be ‘Narrowly Construed’

Posted Tuesday, April 10, 2018 6:32 am

An auto dealership’s service advisors, "who consult with customers about their servicing needs and sell them servicing solutions," are exempt from overtime under the FLSA, the U.S. Supreme Court held, taking on this Ninth Circuit case for a second time in a decision authored by Justice Thomas. The exemption in question, set forth in Section 213(b)(10)(A), applies to "any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, trucks, or farm implements." Service advisors "obviously" are salesmen, Thomas wrote, and they service automobiles. Therefore, they are covered. The esoteric FLSA exemption issue sharply divided the Justices, who resolved the dispute in a 5-4 decision. But the bigger story here—the implications of which may be seismic for wage-hour litigation—is the majority’s overt rejection of the notion that exemptions to the FLSA are to be narrowly construed. It did so, Justice Ginsburg’s dissent decried in a footnote, without even "acknowledging that it unsettles more than half a century of our precedent" (Encino Motorcars, LLC v. Navarro, April 2, 2018, Thomas, C.).

Round one at SCOTUS. The Supreme Court first saw this case in 2016, when it dealt with the larger question of whether the Department of Labor’s 2011 policy reversal on the underlying exemption question was entitled to deference. It wasn’t, the Court held, in a 6-2 end-of-term decision. The FLSA exemption had long been construed to cover service advisors, and this was the DOL’s regulatory interpretation as well, in place since 1978. Auto dealerships had relied on this understanding and had negotiated and structured service advisors’ compensation plans accordingly, the High Court observed. Yet the DOL made an about-face, without offering a reasoned explanation for revising its regulation to hold that automobile service advisors were entitled to overtime. (Justice Ginsburg had filed a concurring opinion in the 2016 decision, offering an inkling of where she would eventually come down on the issue in her dissent here. Justice Thomas had dissented, arguing the Court should decide the merits right then and there, and should find the services advisors exempt.).

Ninth Circuit held firm on remand. Considering the question anew following the Supreme Court’s remand, the Ninth Circuit held once again that the exemption did not apply. Without regard to the disfavored 2011 DOL rule, the court of appeals now applied what it believed to be the most natural reading of the statute itself, and concluded that Congress did not intend for the exemption to exempt the service advisors from overtime. The Supreme Court granted certiorari again to address the exemption question head-on.

Parsing the text. The majority rejected the Ninth Circuit’s use of the distributive canon in reaching what it held was the wrong conclusion. The FLSA exempts: "any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles" at a covered dealership. The appeals court had matched "salesman" with "selling" and "partsma[n] [and] mechanic" with "servicing," but the text of the exemption uses the word "or" to connect all of its nouns and gerunds, and "or" is "almost always disjunctive," Thomas reasoned. "The more natural reading is that the exemption covers any combination of its nouns, gerunds, and objects." Use of the word "or" to join "selling" and "servicing" therefore should be read to mean that "the exemption covers a salesman primarily engaged in either activity."

Servicing automobiles. Further, service advisors "obviously" are salesmen, the Court found, relying on the ordinary meaning of the term—"someone who sells goods or services"—in the absence of a statutory definition, but they don’t "sell" automobiles. So the crux of the issue is whether they are "salesmen" who "service" automobiles. "Under the best reading of the text," the majority concluded that they are. They listen to customers about their concerns, suggest repairs and maintenance services, sell accessories or replacement parts, and follow up with customers, explaining the repairs being performed and informing them if new problems are encountered while repairs are underway. In short, service advisors "are integral to the servicing process," Thomas wrote. "If you ask the average customer who services his car, the primary, and perhaps only, person he is likely to identify is his service advisor." And while service advisors don’t spend most of their time performing the actual repairs, neither do partsmen—and no one disputes that they fall within the scope of the exemption.

"Narrowly construed"? The Ninth Circuit also invoked the oft-cited principle that exemptions to the FLSA are to be construed narrowly. "We reject this principle as a useful guidepost for interpreting the FLSA," the majority pronounced, noting that the statute itself suggests no such restraint. The text of section 213(b) alone contains more than two dozen exemptions, including the exemption in dispute here. "Those exemptions are as much a part of the FLSA’s purpose as the overtime-pay requirement," the majority said. "We thus have no license to give the exemption anything but a fair reading."

The Court also rejected the Ninth Circuit’s use of legislative history and its reliance on the DOL’s 1966–1967 Occupational Outlook Handbook to bolster its holding that the statutory exemption did not apply to the service advisors.

No retroactive liability concerns. According to the employer, a Ninth Circuit affirmance would mean that "decades of settled expectations" would be disrupted, unfairly exposing dealerships to "substantial retroactive liability." But Ginsburg dismissed these fears as overstated. The FLSA’s affirmative defense would shield these employers from liability if they could show good-faith reliance on superseded agency guidance.

At any rate, the FLSA also exempts employees of "retail or service establishments" who earn more than half their pay in commission, as long as their regular rate of pay is more than 1.5 times the minimum wage. So even if the Section 213 exemption didn’t cover them, the employer’s more highly compensated service advisors would continue to be exempt from overtime anyhow. The dealership might well want to have all its service advisors be exempt from receiving overtime pay, including its lower-paid advisors. But "[b]y stretching the §213(b)(10)(A) exemption to encompass even the lowest income service advisors compensated on commission," Ginsburg wrote, the majority had upset the "deliberate balance" that Congress had struck between exempting higher-paid commissioned workers while ensuring that "more vulnerable workers in this occupation" continued to be protected from "substandard wages and oppressive working hours."

Precedent favors narrow construction. As for the majority’s pronouncement that FLSA exemptions need not be narrowly construed, Ginsburg observed that the High Court had long recognized that the "particularity" of FLSA exemptions meant they were not to be enlarged "by implication," and any jobs that fell outside "narrow and specific" exemptions were to remain covered by the Act’s protection. The majority defied these traditions by enlarging the specific exemption at issue here, and also by disavowing the "narrowly construed" principle outright. "The Court today, in adding an exemption of its own creation, veers away from that comprehension of the FLSA’s mission. I would instead resist, as the Ninth Circuit did, diminishment of the Act’s overtime strictures."

Source: Wolters Kluwer (written by Lisa Milam-Perez, J.D.)

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