Supreme Court Overturns 9th Circuit Court of Appeals on FLSA Service Advisor Exemption Rule

Article by Jennifer Kobylarz

In Encino Motorcars, LLC v. Navarro, the 9th Circuit Court of Appeals determined that Service Advisors are not exempt from the overtime rules of the Fair Labor Standards Act. This meant that for dealerships within the 9th circuit – dealerships operating in California, Washington, Nevada, Arizona, Oregon, Alaska, Hawaii, Idaho, and Montana – the §213(b)(10)(A) overtime exemption rule could no longer be used for service advisors. Pay plans for service advisors, which had been specifically designed around this exemption, could now cost dealerships a significant amount of money. However, on June 20, 2016, in a 6 to 2 decision, the US Supreme Court vacated the 9th Circuit’s decision.

How did we get here?

The issues surrounding dealership employees, service advisors, and the FLSA overtime exemption rule have been scrutinized for over fifty years. In 1961, Congress determined that all dealership employees were exempt from the overtime rules; however, this exemption did not last long. The exemption was repealed in 1966 and replaced with a much more narrow exemption which applied only to “[a] salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, trailers, trucks, farm implements, or aircraft.”

In 1970, the US Department of Labor (DOL) limited who could qualify as a salesman under the exemption by issuing a definition of the term “salesman” to include only a person who sells vehicles or farm implements. This definition explicitly disqualified service advisors from qualifying as exempt under the overtime exemption rule. Fortunately, for dealerships, this definition was flat out rejected by the 5th Circuit Court in 1973.

The 5th Circuit’s rejection of the DOL’s definition prompted Congress to amend the statute again, exempting “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, trucks, or farm implements;” thus specifically including service advisors under the exemption. The DOL aligned its position with Congress in an opinion letter issued in 1978 which specifically stated that service advisors could be exempt under the amended statute. The DOL further confirmed this position when it issued its 1987 amended Field Operations Handbook.

All involved parties seemed to be content over the two decades that followed. That is until the DOL abandoned its 1978 position in 2011. The DOL reissued its 1970 regulation, which severely limited who would qualify as a salesman under the overtime exemption rule – a regulation that had been abandoned in earlier years because the courts had rejected the validity of the definition.

The Supreme Court’s Decision and How it Affects Dealerships

When the 9th Circuit heard the Encino Motorcars case it determined that the DOL’s decision to revert back to the 1970 regulation was completely justified and “rationally explained.” The Court believed that there was sufficient documentation and regulatory history to prove that the DOL had given this issue “considerable thought,” thus ruling that service advisors were not exempt from overtime.

However, the Supreme Court viewed the DOL’s sudden position change as completely unjustified, stating that the department’s decision to completely abandon its two-decade old position and revert to the salvaged regulation was “issued without the reasoned explanation.”

The case is now back to the 9th Circuit. They will have to reconsider the issues and issue a new ruling following the guidance of the Supreme Court. For dealerships outside of the 9th Circuit’s jurisdiction, this means that they can, likely, continue to operate under the assumption that service advisors are still exempt, since there is not any issued authority preventing them from doing so. Dealerships within the 9th Circuit’s jurisdiction have less certainty on the issue. They have to wait until the court issues a new opinion on the matter in order to determine whether or not service advisors must be paid overtime.

The 9th Circuit could very well decide to fall in line with the 4th and 5th Circuits and the Supreme Court of Montana, who have already ruled that service advisors are exempt from the overtime requirements, but only time will tell.

About the author:

Jennifer Kobylarz, MST is with the Tax Team of Rosenfield and Company PLLC in their Orlando office. Jennifer obtained her Masters of Science in Taxation with honors from the University of Central Florida and joined the firm in 2012. In her spare time, Jennifer is a world class Pool Player!