Taking a long-standing California issue to the federal courts, on March 24th the Ninth Circuit Court of Appeals continued the assault on California car dealerships that has been ongoing for at least the last two years since the California state Supreme Court’s landmark – and devastating – decision in Gonzalez v. Downtown LA Motors, LP.  Taking this issue to federal district court, and ignoring established interpretations of the Fair Labor Standards Act by its sister appellate courts in the Fourth and Fifth Circuits, as well as by the Montana Supreme Court, the Ninth Circuit adopted the U.S. Department of Labor’s 2011 interpretive regulations about the dealership exemption to hold in Navarro v. Encino Motorcars, LLC that service advisors do not qualify as “salesmen, partsmen, or mechanics engaged in the selling or servicing of automobiles.”

In Navarro, four service advisors sued Encino Motorcars (a dealership that sells and services new and used Mercedes-Benz vehicles) in 2012 for violations of the FLSA.  As service advisors, plaintiffs were responsible for diagnosing required services and repairs for customers bringing their cars to the dealership, and then suggesting additional services and repairs that may not be immediately needed – in essence, they sold, not cars, but car services. Plaintiffs asserted that the defendant violated the FLSA by failing to pay them overtime.  The federal District Court dismissed their overtime claims on the ground that, as service advisors, they fell within the FLSA’s exemption for dealership salesmen.

On appeal, the Ninth Circuit disagreed with the trial court’s ruling.  In doing so, the Ninth Circuit relied on the Department of Labor’s regulatory definitions of salesman, partsmen, and mechanic, which limit the dealership exemption to salesmen who sell vehicles and partsmen and mechanics who service vehicles.  Because service advisors neither sell vehicles nor service them, but sell services, the court concluded they are not exempt from the FLSA’s overtime requirements.

The Ninth Circuit’s decision is at odds with a Fifth Circuit decision from 1973, a more recent Fourth Circuit decision from 2004, and a handful of federal district courts, in addition to the Montana Supreme Court, which have all expressly interpreted the FLSA’s dealership exemption to extend to service advisors.  While acknowledging that interpreting the exemption to include service advisors was supported by good arguments, the Ninth Circuit ultimately sided with the Department of Labor – thereby creating a circuit-split – as a result of its application of the U.S. Supreme Court’s “Chevron test of reasonableness.”

Under the Chevron test of reasonableness, a court is required to perform a two-step inquiry.  At step one, the court determines whether the precise question at issue is directly addressed by statute.  If it is, the inquiry ends there.  If it is not, then the court proceeds to step two, where it considers an appropriate agency’s interpretation of the statute.  If the court deems the interpretation reasonable, then the court must not substitute its own construction of the statutory provision.  The Ninth Circuit believed it was required to apply this test since it was considering a regulation that was duly promulgated after a notice-and-comment period.

The Ninth Circuit did not find the FLSA to be clear and unambiguous with regard to service advisors falling under the dealership exemption.  Therefore, the Court considered it appropriate to assess the reasonableness of the DOL’s regulatory definitions.  According to the DOL’s interpretation of the FLSA exemption, because service advisors did not personally sell cars (even if they were “salesmen” in a generic sense) and because they did not personally service vehicles, they fall outside the statutory definition.  The Ninth Circuit considered this to be a reasonable interpretation of the FLSA and, as a result, it reversed the lower court’s ruling and held service advisors to be non-exempt employees. 

The Ninth Circuit’s holding in Navarro is certain to have an immediate impact on the car dealership industry in California, as a long-standing and heretofore accepted practice of treating service advisors as exempt employees has been officially deemed to violate the FLSA.  Unless overturned by the U.S. Supreme Court, this decision will likely encourage a new floodgate of class action litigation as aggrieved former service advisors sue dealerships for purported unpaid overtime and other related wage-and-hour claims.

Dealerships must continue to closely monitor both state and federal authority to insure compliance with both the FLSA and state labor laws.  Because Navarro is at odds with the Fourth and Fifth Circuits, and the Ninth Circuit has now created a split in the circuit courts, it is likely that further consideration will be given at both the state and federal level, and that, if appealed, the U.S. Supreme may accept consideration of the issue.  Unless and until that happens, though, dealerships should continue to be vigilant in their efforts to remain compliant with current statutes and the case law interpreting them.