On June 20, 2016, the Supreme Court of the United States issued a ruling regarding the Fair Labor Standards Act’s (FLSA) overtime exemption for “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles” at a covered dealership under section 213(b)(10)(A) of the FLSA. A 1970 U.S. Department of Labor (DOL) regulation limited this overtime exemption to salesmen (who primarily obtained orders or made sales of vehicles) and excluded service advisors (who sold service and maintenance services) from its coverage. After several courts rejected this interpretation, the DOL’s Wage and Hour Division (WHD) issued an opinion letter in 1978 and amended its Field Operations Handbook in 1987 stating that service advisors could be exempt from overtime under section 213(b)(10)(A).  However, a 2011 final rule reaffirmed this initial regulation’s position. Because the automobile industry has relied on service advisors being exempt, and because the DOL released the 2011 rule without providing a “reasoned explanation” for its change in position, the Court ruled that the 2011 rule is not entitled to deference. The Supreme Court concluded that the overtime exemption “must be construed without placing controlling weight on the Department’s 2011 regulation” and remanded the case to the Ninth Circuit Court of Appeals. Encino Motorcars, LLC v. Navarro, Supreme Court of the United States, No. 15–415 (June 20, 2016).

Background

Five current and former service advisors working at an automobile dealership filed suit alleging that they were entitled to, but were not paid, overtime compensation for hours worked over 40 in a week. The dealership argued that the service advisors were exempt from the overtime provisions of the FLSA under section 213(b)(10)(A). The service advisors argued that court must defer to the DOL’s 2011 regulations, which exclude service advisors from the overtime exemption.

The district court dismissed the overtime claim, concluding that the workers fall within the FLSA’s section 213(b)(10)(A) exemption. The Ninth Circuit reversed the district court’s holding, applied Chevron deference to the DOL’s 2011 regulation, and found that the service advisors are not exempt from the overtime requirements. Under the principle ofChevron deference, “when an agency is authorized by Congress to issue regulations and promulgates a regulation interpreting a statute it enforces, the interpretation receives deference if the statute is ambiguous and if the agency’s interpretation is reasonable.”

The Supreme Court decided to hear the case to decide whether the section 213(b)(10)(A) exemption should be interpreted to include service advisors. According to the Court, “[t]o resolve that question, it is necessary to determine what deference, if any, the courts must give to the Department’s 2011 interpretation.”

The Supreme Court’s Decision

One procedural requirement of the administrative rulemaking process, the Court wrote, is that an agency must provide an adequate explanation for its decision. When an agency fails to give adequate reasons, then its action is arbitrary and capricious and cannot be afforded deference. The Court also recognized that agencies can change their position on an interpretation but that they must provide a “reasoned explanation” for the change that acknowledges the change, explains good reasons for the new position, and addresses reliance that interested parties may have taken on a previous interpretation.

Justice Kennedy, writing for a 6-2 majority, stated that “the unavoidable conclusion is that the 2011 regulation was issued without the reasoned explanation that was required in light of the Department’s change in position and the significant reliance interests involved.” The DOL “gave little explanation for its decision to abandon its decades-old practice of treating service advisors as exempt under §213(b)(10)(A)” the Court noted, when  it issued the 2011 final rule following the 1970 regulation and interpreting “salesman” to mean only an employee who sells automobiles.

Thus, Justice Kennedy concluded, “[i] t follows that this regulation does not receive Chevron deference in the interpretation of the relevant statute” and “§213(b)(10)(A) must be construed without placing controlling weight on the Department’s 2011 regulation.” The Supreme Court vacated the Ninth Circuit’s judgment and remanded the case for further proceedings consistent with this opinion.

Practical Impact

Automobile dealers that have used the section 213(b)(10) overtime exemption for their service advisors definitely have received good news from the Supreme Court that the DOL’s 2011 regulations interpreting the salesmen, partsman, or mechanic exemption from overtime is arbitrary and capricious. Unfortunately, however, this good news must be measured against the backdrop that the Ninth Circuit will revisit the issue. As Justice Ginsburg pointed out in a concurring opinion, the appellate court suggested already that automobile service advisors may not be covered by the statute because they personally do not service or sell automobiles.

On a larger scale, this decision may call into question other aspects of the WHD’s 2011 rulemaking that also should not carry the force of law. The Obama administration completed this 2011 rulemaking after a notice of proposed rulemaking was initiated during the Bush administration in July of 2008 to clarify several FLSA regulations. These other regulatory actions that also may be arbitrary and capricious include the rules related to the use of tips where an employer does not take a tip credit and the DOL’s statement that the Ninth Circuit had incorrectly decided the case of Cumbie v. Woody Woo, Inc..  Another one is the DOL’s 2008 fluctuating workweek methodology regulation allowing employees paid on a fluctuating workweek basis to receive non-overtime bonuses or incentive payments, which DOL in 2011 stated was incompatible with the fluctuating workweek methodology.