Justices Consider If FLSA Covers Car Service Advisers

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By Kevin McGowan

April 20 — Employees who work as service advisers for car dealerships aren't eligible for overtime pay because they fall within a Fair Labor Standards Act exemption, a lawyer for a California auto dealership argued to the U.S. Supreme Court.

During an April 20 oral argument, the justices heard conflicting views on whether an FLSA exemption codified at 29 U.S.C. § 213(b)(10)(A) precludes the overtime pay claims of auto dealership employees who meet and greet car owners, evaluate the owners' service requests, provide cost estimates and suggest additional services as appropriate.

The U.S. Court of Appeals for the Ninth Circuit decided such employees fall outside the FLSA exemption, applying a 2011 Labor Department final rule that said service advisers aren't covered by Section 213(b)(10)(A) and therefore must receive overtime pay if they work more than 40 hours a week.

The Supreme Court granted review Jan. 15 (10 DLR B-1, 1/15/16).

Much of the oral argument focused on whether the court should defer to the DOL's current regulation, which was issued after the department for 33 years had acquiesced in court decisions holding service advisers are exempt.

A separate FLSA exemption codified at 29 U.S.C. § 207(i) removes certain sales employees paid on commission from the FLSA's overtime pay requirements, Justice Ruth Bader Ginsburg noted. She asked attorneys for both sides if deciding the scope of the car dealership exemption has much practical significance given that many service advisers might also be exempt under Section 207(i).

Encino Motorcars LLC, a Mercedes-Benz dealership in California, argued the Labor Department's interpretation is unreasonable as a matter of law, as the FLSA exempts “any salesman, partsman or mechanic primarily engaged in selling or servicing automobiles.”

The DOL's reading of the exemption conflicts with two federal circuit decisions, numerous district court rulings and the department's own enforcement position from 1978 until 2011, Encino said.

No Deference Owed, Dealer Argues

No judicial deference is owed to the DOL's current interpretation, said attorney Paul D. Clement, who represents Encino.

An agency regulation adopted after notice-and-comment rulemaking is “clearly the classic case” for Chevron deference, said Justice Elena Kagan, referring to Chevron U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984).

But Justice Stephen Breyer said he was troubled both by the Labor Department's failure to explain why it was changing its mind or to address the interests of employers who relied on the previous statutory interpretation.

In an exchange with Kagan, Clement said the DOL essentially said that despite every court rejecting the agency's 1970 interpretive regulation that service advisers aren't exempt, the department in 2011 said “we still think we have the better view.” The 2011 rule also deleted an explanation regarding service advisers' coverage under the act that the department had provided in 1970, he said.

Regarding employers' reliance interests, Kagan said the Labor Department regulation applies prospectively only, so car dealers wouldn't be liable for not paying overtime to service advisers before the new rule's May 5, 2011, effective date.

Under the Portal-to-Portal Act, a 1947 FLSA amendment, employers also have a good-faith defense if they relied on the DOL's previous interpretation, Kagan said.

There's a “pretty unique dynamic” in this case, in which the DOL acquiesced in court rulings that service advisers were exempt, particularly for employers located in areas covered by the federal appeals courts for the Fourth and Fifth Circuits, Clement said.

He questioned if a car dealership in those places really should change its operations when circuit precedent holds service advisers are covered by the FLSA exemption and that the DOL's contrary interpretation is incorrect.

Encino doesn't think the FLSA exemption is “ambiguous at all” but rather that service advisers fall within its “plain terms” because they are sales persons primarily engaged in servicing autos, Clement said.

‘Integral' Part of ‘Servicing' Team

Justice Sonia Sotomayor asked if service advisers existed in 1966, when Congress replaced an FLSA provision exempting all car dealership employees with the more limited exemption codified at Section 213(b)(10)(A).

Auto dealers in 1966 had a service adviser job category with pay arrangements similar to those used today, Clement replied. Sotomayor asked why Congress didn't just specify service advisers along with salesmen, partsmen and mechanics when it drafted the exemption.

Congress used the expansive term “any salesman” and linked that to “selling” and “servicing” of automobiles, Clement replied. That effectively covered service advisers, who “sell the servicing” of cars, he said.

If Congress intended to include service advisers, it would say exactly what the exemption says now, Clement said. Service advisers play a part in the “servicing process,” which involves diagnosing a car's problems, providing an estimate, getting the necessary parts and fixing the car, he said.

The service adviser, parts employee and mechanic are “three different people working as a team,” Clement said.

The five Encino service advisers who sued the dealership in 2012 and the Justice Department argue that “servicing” should be construed “very narrowly,” Clement said.

But service advisers are “an integral part” of the servicing process and Congress didn't mean an employee personally must work on the car to be included in the exemption, said Clement, a partner with Bancroft PLLC in Washington.

Not Engaged in ‘Servicing' Cars

Representing the Encino employees, Stephanos Bibas said service advisers aren't covered by Section 213(b)(10)(A) because they don't sell or service cars. Instead, they “merely write up paperwork,” putting in fixed hours in customer-focused positions, said Bibas, a law professor at the University of Pennsylvania in Philadelphia.

Justice Samuel Alito asked why the exemption includes “partsmen” if Congress intended only to exclude those who sell or fix cars. The parts employees work alongside mechanics and may be required to customize parts in certain circumstances, Bibas replied. Parts employees typically engage in a “back and forth” with the mechanic, and it's not a “customer-facing” job, he said.

If parts employees are covered under the exemption's “servicing” prong, then why draw the line at service advisers, whose jobs also relate to servicing the car, Alito asked.

The dictionary definition of “engaged in” servicing means “caring and maintaining” for the auto, Bibas said. The FLSA exemption's use of “engaged in” doesn't broaden the definition of “servicing” to include service advisers, he said.

If a service adviser pops open a hood to investigate a car owner's report of an unusual noise, is he then engaged in “servicing,” Chief Justice John Roberts asked.

Unlike mechanics, service advisers have a “customer-facing role,” Bibas replied. They're not “going under the hood” or giving the customer a ‘“final diagnosis” on what needs to be repaired, he said.

But the first thing the service adviser does is give the owner a cost estimate, Justice Anthony Kennedy said. That's a “preliminary estimate” but the service adviser must consult with the mechanic for a final projected cost, Bibas said.

Many car dealership employees perform work that's “part of the general process” of selling or servicing cars, but it's insufficient to bring them under the FLSA exemption, Bibas said.

Unlike Clement, Bibas argued that “selling services” to car owners isn't “servicing” autos within the exemption's meaning.

Prerequisites for Deference?

The FLSA exemption is ambiguous and probably can be read “either way,” to include service advisers or not, Breyer said.

But when a federal agency “changes its mind” about what the statute means, the agency “should explain it,” Breyer said. The Labor Department's bare assertion that it disagrees with the relevant court decisions isn't sufficient, he said.

It's “kind of extreme” for the DOL to read the FLSA one way for more than 30 years, and then to change its interpretation with little explanation, Breyer said.

The department engaged in notice-and-comment rulemaking prior to issuing the 2011 rule, which makes “any potential for surprise unlikely,” Bibas replied. The DOL received seven comments specifically on the Section 213(b)(10)(A) exemption, with five supporting the interpretation that service advisers aren't covered, he said.

But that still doesn't answer why the DOL made the change, Breyer said.

Kagan asked if the Encino employees are seeking damages for pre-2011 denials of overtime pay. The court complaint was filed in 2012 and the FLSA limitations period goes back two years, Bibas replied.

There's nothing retroactive about applying the DOL's new interpretation to post-2011 conduct, he said.

So you think employers should be liable for damages in a private FLSA lawsuit when the Labor Department previously said it wouldn't enforce an interpretation that service advisers are entitled to overtime, Roberts asked.

Pressed on the point, Bibas said, “We're willing to concede the pre-2011 damages.”

Practical Significance Discussed

How many service advisers actually will be affected by a court ruling on this exemption, Ginsburg asked the lawyers.

There's a “wide range” of compensation methods for service advisers, with many earning less than 150 percent of the minimum wage, which is the threshold for coverage under the 207(i) exemption for workers paid on commission, Bibas replied. Some service advisers make as little as $22,000 a year, he said.

Dealership compensation structures vary for service advisers, Clement said. Although Clement said he lacked “reliable statistics” on the issue industry-wide, he said “a significant number” of service advisers aren't paid on commission, but instead receive a fixed salary.

Those employees wouldn't be eligible for the 207(i) exemption, so it's important for car dealers and the employees to know if they are exempt under Section 213(b)(10)(A), Clement said.

About 45,000 service advisers work for 18,000 dealerships nationwide, earning an average $66,000 per year, according to the National Automobile Dealers Association, Clement said. The NADA figures show auto mechanics make an average of $59,000 a year and parts employees an average of about $55,000 a year, he said.

When service advisers are paid on commission, they generally share those commissions with mechanics and parts employees, Clement said. As a practical matter, it would be strange for the court to rule the highest-paid members of the auto servicing team are entitled to overtime pay, but mechanics and parts employees remain exempt, he said.

Obama Administration's Views

Representing the United States as an amicus, Assistant to the Solicitor General Anthony Yang said the government believes the Section 213(b)(10)(a) exemption is ambiguous. But the Labor Department's interpretation that it doesn't include service advisers is entitled to Chevron deference, he said.

Clement in his argument “does have a point” about the Labor Department deleting its more specific explanation about why service advisers aren't included, Kagan said. She asked why the Labor Department excised that explanation from its 2011 rule. Apparently it was an “inadvertent mistake” in the drafting process, Yang said.

“I really didn't expect you to say that,” Kagan said. That's “not an A-plus explanation,” she said.

Service advisers aren't “salesmen” as a matter of statutory construction, Yang replied. The DOL's process for reaching that conclusion wasn't “perfect” but it should get “a passing grade” from the court, he said.

To contact the reporter on this story: Kevin McGowan in Washington at kmcgowan@bna.com

To contact the editor responsible for this story: Susan J. McGolrick at smcgolrick@bna.com

For More Information

Text of the oral argument transcript is available at http://src.bna.com/egU.