Are Service Advisors Now Exempt? Hold on, Maybe Not!

On April 2, 2018 the U.S. Supreme Court ruled that service advisors at car dealerships are exempt under the federal Fair Labor Standards Act (FLSA).  Dealers in California, however, should seek advice of legal counsel before concluding that the decision is the final word.

Under §213(b)(10)(A) of the FLSA, overtime pay requirements do not apply to any salesman engaged in selling or servicing automobiles if his employer is engaged in the business of selling vehicles to ultimate purchasers.  Between 1978 and 2011, consistent with several federal court decisions, the Department of Labor (DOL) interpreted this language to mean that service advisors were exempt from overtime pay.  But in 2011, the DOL reversed course, finding the term “salesman” to exclude service advisors.

Relying on the DOL’s 2011 finding, in 2012 service advisors sued the dealer seeking overtime pay.  Encino Motorcars, LLC defended, rejecting the DOL’s last interpretation and contending that, under the FLSA, service advisors interact with customers and sell them services for their vehicles.  The dealer noted that service advisors meet customers, hear their concerns, suggest repairs and maintenance services, sell new accessories or replacement parts; record service orders, follow up as services are performed, and explain repairs and maintenance work when customers pick up their cars.

The Ninth Circuit (which covers California), citing the principle that exemptions to the FLSA be construed narrowly and the absence of any reference to service advisors in the legislative history, concluded that Congress did not intend to exempt service advisors.  It identified service advisors as “salesmen” and associated them only selling, rather than servicing.

The U.S. Supreme Court reversed, rejecting the narrow approach to interpreting the FLSA in favor of one that is “fair”.  Relying on Encino Motorcars’ list of tasks performed, the Court determined that a service advisor is obviously a salesman, that is, a man who sells goods and services.  The Court found that the exemption covers a service advisor primarily engaged in either selling or servicing, and, going back to the language of the FLSA, concluded that an advisor is a “salesman. . .primarily engaged in …servicing automobiles.”

While dealers across the country may breathe a sigh of relief, dealers in California should be cautious in considering whether to reclassify or treat service advisors as exempt.  First, California courts do not follow the “primarily engaged” test found in the FLSA.  Rejecting that standard in favor of a quantitive test, the California Supreme Court in Ramirez v. Yosemite Water Co., 20 Cal.4th 785 (1999), ruled that a California employer claiming that an employee is exempt must demonstrate that the individual spends more than 50% of his time performing exempt tasks.  Whether the tasks identified by Encino Motorcars in defending its position occupy more than 50% of service advisors’ time at a dealership, as opposed to time spent directing service technicians or their supervisors, completing warranty paperwork for the manufacturer, and other tasks unrelated to credited by the Court, is fact specific to each dealership and invites a time study analysis.

Second, California courts have held that California wage laws often diverge from the minimal standards established by federal law, and when state law is more favorable to employees, state law prevails.  Mendoza v. Nordstrom, Inc, 2 Cal.5th 1074 (2017); Tidewater Marine Western, Inc. v. Bradshaw, 14 Cal.4th 557 (1996).  Payment of overtime to service advisors may be more favorable to them in some cases, and California courts would be more inclined than not to determine that a service advisor is non-exempt under state law.

Finally, employees in California aggressively pursue perceived rights in court, unfazed by existing precedent and inventive of novel theories of liability and damages.  Controlling the overtime hours worked by service advisors, who often stay late to meet customers, may be difficult.  Consequently, a dealer must carefully weigh the risks of liability and damages as well as the costs of defense in deciding whether to classify service advisors as exempt.

The Above was written by Art Silbergeld.

Art Silbergeld, a partner at Thompson Coburn in Los Angeles, defends employers, including many car dealerships, in federal and state court wage and employment litigation.  Recognized by his peers as one of the top management defense attorneys in California, Art has worked closely with Jim Potts over three decades.  He may be reached at (310) 282-9412 and asilbergeld@thompsoncoburn.com.

 

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