Supreme and Second Circuit Court Decisions May Reduce Overtime Eligibility

Several months ago, the U.S. Supreme Court held that service advisors employed by car dealerships are exempt from the overtime provisions of the Fair Labor Standards Act (“FLSA”). Encino Motorcars, LLC v Navarro (4/2/18). It also held that the FLSA’s overtime exemptions should be read “fairly” and not “narrowly,” which may reduce the number of employees eligible for overtime pay in all industries.

Beginning in 1961, Congress exempted all employees working at car dealerships from overtime requirements. In 1966, it narrowed the exemption to “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles” at a covered dealership. Service advisors were considered exempt under the 1966 language. In 2011, however, the Department of Labor (“DOL”) issued a new rule that removed service advisors from the exempt group, suddenly making them eligible for overtime pay. The change was based on DOL’s newly formed concept that service advisors should no longer be considered exempt because they did not sell cars or perform actual maintenance services on a vehicle.

Based on the 2011 rule, a group of service advisors in California sued their employer for back overtime pay. After extended litigation, the Ninth Circuit ruled for plaintiffs based on the 2011 rule change, legislative history, and its theory that FLSA exemptions should be narrowly interpreted.

In reversing the Ninth Circuit, the Supreme Court held that although service advisors are not engaged in selling automobiles or directly involved in servicing cars by performing mechanical work, they are integral in selling auto repair services.  The Court likened them to partsmen, who the parties agreed were exempt. Neither partsmen nor service advisors sell vehicles, nor do they spend time under the hood performing direct mechanical services. Instead, both respectively support the servicing of automobiles by selling parts (partsmen) and particular services (service advisors).

While the ruling has a direct impact on auto dealerships, it also has more widespread application. The Court expressly rejected the Circuit Court’s reasoning that FLSA exemptions should be read narrowly. Instead, it articulated a “fair reading” standard. This may help employers argue that other exemptions should be read more broadly and that some current non-exempt positions should instead be considered exempt, making them no longer eligible for overtime pay.

More recently, the Second Circuit Court of Appeals, which covers Connecticut, became the first federal appellate court to rely on Encino when it ruled in favor of two employers by applying a “fair reading” standard in interpreting the FLSA’s exemption covering door to door salespersons, Flood v. Just Energy Marketing Corp (9/19/18), and limousine drivers, Munoz-Gonzalez v DLC Limousine Services (9/19/18).

Remaining to be seen is the impact state laws may have on any future attempts to broaden the FLSA’s exemptions. As such, employers should consult with counsel before reclassifying jobs, as damages, including backpay liabilities, can be significant.