The Supreme Court ruled on June 20, 2016, that the U.S. Department of Labor's (DOL) 2011 regulation removing a long-standing exemption to overtime pay for auto service advisors was “procedurally defective.” In a 6-2 opinion, the Court stated the DOL failed to follow the correct procedures in issuing a regulation by not giving adequate reasons for its decision.
In Encino Motorcars, LLC v. Navarro, No. 15-415, the plaintiffs were “service advisors” who worked at a Los Angeles-area automobile dealership. The service advisors in this case performed tasks similar to other service advisors–meeting with customers, listening to their concerns about their cars, suggesting repairs and maintenance services, and selling services for the vehicles. The plaintiffs alleged they were denied overtime under the Fair Labor Standards Act (FLSA).
The dealership, relying on an overtime exemption for “salesman, partsmen, and mechanics” who are primarily engaged in “selling or servicing automobiles” under the FLSA (see 29 U.S.C. 213(b)(10)(A)), moved to dismiss the complaint. The motion was granted by the district court, but reversed by the Ninth Circuit. Critically, in holding the service advisors were entitled to overtime, the Ninth Circuit deferred to a 2011 Department of Labor regulation stating the exemption did not apply to service advisors.
The “Automobile Dealer Exemption”
First enacted in 1966, the 213(b)(10)(A) exemption at issue is also known as the “automobile dealer exemption,”. Four years later, in 1970, the DOL issued a regulation stating service advisers were not covered by the exemption, and, therefore, eligible for overtime pay. The exempt status of such employees flip-flopped throughout the 1970s; however, in 1978 the DOL issued an opinion letter specifically taking the position that service advisors could be overtime exempt under 29 U.S.C. § 213(b)(10)(A).
The DOL confirmed this position nine years later when it clarified in its Field Operations Handbook that service advisors were to be treated as exempt. In 2008, the DOL issued a notice of proposed rulemaking stating that it intended to revise its regulations to reflect the overwhelming court authority on the matter and its own long-standing practice on the issue.
In 2011, DOL issued a final rule addressing service advisors, as well as a number of other issues on a broad range of topics. Many of these reversed course from previous long-held DOL positions, including the DOL's announcement that its 2008 proposal on service advisors would be rejected and the final rule would state the exact opposite: that service advisors are not exempt because they do not themselves sell automobiles.
The SCOTUS Decision
On June 20, 2016, the Supreme Court granted certiorari in Encino Motorcars, LLC v. Navarro. To resolve the case, the Court identified a separate error by the U.S. Court of Appeals for the Ninth Circuit (San Francisco) on which all of the Justices could agree: the Ninth Circuit held service advisors were entitled to overtime by deferring to a 2011 Department of Labor regulation. But that regulation was issued without any reasoned explanation for the change. Under those circumstances, the Supreme Court held, the regulation was arbitrary and capricious and entitled to no deference.
The Court stressed that “[t]he retail automobile and truck dealership industry had relied since 1978 on the Department's position that service advisors were exempt from the FLSA's overtime pay requirements” and had “negotiated and structured their compensation plans against this background understanding.” Therefore, “[i]n light of this background, the Department needed a more reasoned explanation for its decision to depart from its existing enforcement policy.”
Ultimately, the Court remanded the case to the Ninth Circuit to determine, in the first instance (without deference to the DOL regulation), whether the exemption applied. The Court stated the DOL needed a more reasoned explanation for its decision to depart from its existing policy.
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