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January 9, 2017

Ninth Circuit Finds Service Advisors are Not Exempt from the FLSA

Whether service advisors are exempt from the Fair Labor Standards Act (“FLSA”) continues to vex the federal courts. Today, the Ninth Circuit Court of Appeals held that service advisors are not exempt from the overtime provisions of the FLSA in the same manner as mechanics, salespersons and certain parts personnel. Navarro v. Encino Motorcars, LLC, Docket No. 13-55323 (9th Cir. Jan. 9. 2017).

The case originated in federal district court in California. Service advisors at an Encino, California Mercedes-Benz dealership contended that they were entitled to overtime compensation. The District Court found that the employees were exempt under the so-called “automotive exemption,” which exempts “mechanics, salesmen and partsmen” from the overtime provisions of the FLSA. See 29 U.S.C. 213(b)(10)(A). Although not included under the express language of the FLSA, the United States Department of Labor (“DOL”) had for many years determined that service advisors qualified for the automotive exemption. However, in 2011, it changed its position and determined that service advisors did not sell cars and did not service cars and were not therefore exempt from the FLSA.

On appeal, the Ninth Circuit reversed the District Court. Navarro v. Encino Motorcars LLC, 783 F.3d 1267 (9th Cir. 2015). In reaching its decision, the Ninth Circuit held that the Department of Labor’s most recent position that the service advisors were not exempt was entitled to so-called Chevron deference. 780 F.3d at 1277, citing Chevron U.S.A. Inc. v. Nat. Res. Def. Counsel, Inc., 467 U.S. 837 (1984).

The United States Supreme Court reversed the Ninth Circuit, holding that it had erred in giving deference to the DOL’s position. The Supreme Court directed the Ninth Circuit to reconsider the matter independently, without giving deference to the DOL’s opinion. In today’s decision, the Ninth Circuit reconsidered the matter and has concluded that Congress did not intend to exempt service advisors from the overtime provisions of the FLSA. In reaching this conclusion, the Ninth Circuit recognized that its holding is contrary to the holdings of both the Fourth and Fifth Circuit Courts of Appeals, as well as to an opinion of the Montana Supreme Court. The case has been remanded to the District Court for consideration of the employees’ FLSA claims.

Given this split in authority, it is possible and perhaps even likely, the Supreme Court will again review the case and decide once and for all whether service advisors are covered by the automotive exemption. The Ninth Circuit’s ruling however is now binding on federal courts in the western states and represents persuasive authority on the issue. Whether other courts will adopt its reasoning of course waits to be seen.

Dealers throughout the country would undoubtedly welcome a decision from the Supreme Court declaring service advisors exempt from the FLSA. Even if that day never arrives however, automobile dealers may be able to claim the so-called “retail sales exemption,” for service advisors. That exemption requires the following:

  1. the employee must be employed by a retail or service establishment,
  2. the employee's regular rate of pay must exceed one and one-half times the applicable minimum wage for every hour worked in a workweek in which overtime hours are worked, and
  3. more than half the employee's total earnings in a representative period must consist of commissions.

Dealers should review their pay practices for service advisors. We will of course continue to monitor this important ruling and provide periodic updates. If you should have any questions, please feel free to contact Jim McGrath or Rob Tucker in our New York office.