Auto dealers finally have the answer they have sought regarding compensation for service advisors—and it is favorable. On April 2, 2018, the US Supreme Court issued its much-awaited decision in Encino Motorcars LLC v. Navarro, ruling that service advisors are exempt from overtime pay requirements under the Fair Labor Standards Act (FLSA). The decision not only closes the door on overtime for service advisors, but also may signal a move towards broader interpretation of FLSA exemptions generally.
Section 213(b)(10)(A) of the FLSA excludes from overtime any “salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles.” At issue before the Supreme Court was whether a “service advisor” at auto dealerships— a role held by tens of thousands of employees—is covered by this exemption or whether a service advisor is entitled to overtime pay. The Court heard oral arguments on the issue on January 17, 2018, and, in a 5-4 decision, held that the exemption does apply.
This case has its roots in 2011, when the Obama Administration’s Department of Labor (DOL) issued a final rule that excluded service advisors from the FLSA exemption. The DOL’s rule effectively reversed the agency’s position— held for more than three decades—that service advisors were exempt from overtime pay requirements. In 2012, service advisors employed by Encino Motorcars, which operates a Mercedes-Benz dealership in California, brought the complaint at issue. The service advisors claimed that they were entitled to overtime pay because they worked more than 40 hours per week.
In 2015, the Navarro case found itself in the US Court of Appeals for the Ninth Circuit, which deferred to the DOL’s regulation and found in favor of the service advisors. The Supreme Court first heard the Navarro appeal in 2016 and reversed the Ninth Circuit’s ruling, finding that the DOL provided no “reasoned explanation” for its 2011 change in position. The Supreme Court, however, did not decide on the advisors’ exemption status in its 2016 decision. Instead, it remanded the case to the Ninth Circuit to determine, without deference to the DOL’s 2011 regulation, whether the section 213(b)(10)(A) exemption applied to service advisors. On remand, the Ninth Circuit once again held that service advisors were entitled to overtime pay. The dealers appealed, and the Supreme Court heard the parties’ arguments on the exemption issue in January.
Writing for the majority, Justice Clarence Thomas based the Court’s decision on its finding that “service advisors are salesm[e]n…. primarily engaged in … servicing automobiles.” The primary argument raised by the dissenting opinion, written by Justice Ruth Bader Ginsburg and joined by Justices Stephen Breyer, Elena Kagan and Sonia Sotomayor, was that service advisors “neither sell automobiles nor service (i.e., repair or maintain) vehicles.” The majority disagreed, finding that:
Service advisors are integral to the servicing process. They mee[t] customers; liste[n] to their concerns about their cars; sugges[t] repair and maintenance services; sel[l] new accessories or replacement parts; recor[d]service orders; follo[w] up with customers as the services are performed (for instance, if new problems are discovered); and explai[n] the repair and maintenance work when customers return for their vehicles. 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.
The opinion further found support from the fact that partsmen are covered under the exemption even though they “do not spend most of their time under the hood.” According to Justice Thomas, who was joined by Chief Justice John Roberts and Justices Anthony Kennedy, Samuel Alito and Neil Gorsuch, the inclusion of partsmen under the exemption demonstrates that “the phrase ‘primarily engaged in…. servicing vehicles’ must include some individuals who do not physically repair automobiles themselves but who are integrally involved in the servicing process.”
The Supreme Court also rejected the Ninth Circuit’s use of the distributive cannon—a seldom-used interpretive device pairing terms in sequence—which matched “salesman” with “selling” and “partsman and mechanic” with “servicing.” The Court held instead that the “most natural reading is that the exemption covers any combination of its nouns, gerunds, and objects.” Pointing out that the Ninth Circuit attempted to mix and match three nouns—“salesman, partsman, or mechanic” with one of two gerunds—“selling or servicing,” the Court’s majority stated their “doubt that a legislative drafter would leave it to the reader to figure out the precise combinations.” In other words, under the Court’s decision, a “salesman” who provides “servicing” is covered under the exemption.
In addition to rolling back a key Obama-era measure, the decision potentially opens the door to a broader reading of other FLSA exemptions. Since at least 1945, in its decision in Philips v. Walling, the Supreme Court has directed the nation’s courts that exemptions under the FLSA must be “narrowly construed” against the employer. Narrow construction is a central tenet of FLSA exemption analysis and informs many current judicial decisions and private written legal opinions. Legal opinions by private attorneys regarding FLSA exemptions are unusual because under certain circumstances, an informed opinion based on statute and regulation can be a complete defense to an FLSA misclassification claim. Any change in the Court’s guidance regarding exemption interpretation potentially creates leeway for such legal opinions to find additional exempt roles in the nation’s workforce.
In the 2018 Navarro case, a strict and narrow statutory interpretation would have resulted in more employees being subject to the FLSA overtime pay rules. In its majority opinion, the Court held instead that “[b]ecause the FLSA gives no ‘textual indication’ that its exemptions should be construed narrowly, ‘there is no reason to give [them] anything other than a fair (rather than a ‘narrow’) interpretation.’” This “fair” standard may change the way exemptions are analyzed going forward. As Justice Ginsburg noted in her dissent, the “fair” interpretation guideline, “unsettles more than half a century of our precedent.” Not only did the recent Navarro decision establish the rules of the road for service advisors, but it also may have opened up new vistas for employers.