Navarro decision should have little effect on California auto dealers

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Last week, in Hector Navarro, et al v. Encino Motorcars, LLC, the Ninth Circuit held that auto dealership service advisors do not qualify for the automatic overtime pay exemption under the Fair Labor Standards Act (“FLSA”). This has generated a number of alarmist reports arguing that this new “doom” will “encourage a new floodgate [sic] of class action litigation as aggrieved former service advisors sue dealerships for purported unpaid overtime and other related wage and hour claims.” But dealerships that currently pay their service advisors on a commission basis with California-compliant pay plans satisfy the other applicable federal exemption from overtime pay requirements. And dealerships that are in full compliance with California law fall under that exemption anyway.[1] So don’t panic. At least for now, for California-compliant dealerships, Navarro should have no effect.

Under the FLSA, there had been two mutually exclusive means by which service advisors could be classified as exempt from applicable overtime pay requirements:

  1. Under the express exemption of 29 U.S.C. Section 213(b)(10)(A), which excludes “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles” from overtime pay requirements – an automatic exemption that applies to the specified job positions, as long as the employer is a “nonmanufacturing establishment primarily engaged in the business of selling such vehicles or implements to ultimate purchasers,” or
  2. Under 29 U.S.C. Section 207(i), which excludes commission-paid employees in retail and service establishments from overtime pay requirements – applicable to retail automotive dealership service advisors if both of the following criteria are met:
    • 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
    • more than half the employee's total earnings in a representative period must consist of commissions.[2]

Navarro changed the availability of the automatic exemption for dealership service advisors. In that case, four service advisors sued the dealership for, among other things, failure to pay overtime wages. The Ninth Circuit analyzed the statutory text at length to determine whether “salesman” could refer to the phrase “servicing automobiles” since service advisors sell repair services, not automobiles. Unable to reach a clear answer as to the Congressional intent on this issue, the court applied a lower “reasonableness” standard to the statutory ambiguity in light of the Department of Labor’s (DOL) own regulation interpreting the statute. In 2011, the DOL issued an interpretation of Section 213(b)(10)(A), applying a narrow construction to the law excluding service advisors from the term “salesman.” After performing its own analysis on the statutory construction and contextual wording, the court departed from the holdings of the Fourth and Fifth Circuits and sided with the DOL’s interpretation. The court held that “salesman” referred only to sales of vehicles, not sales of repair services, and service advisors are not covered by this exemption because they do not fall within the “partsman” or “mechanic” positions.

Although the Navarro decision narrows the availability of a federal overtime exemption for service advisors, there is no need for the California auto dealer industry to panic. Many, if not most, auto dealerships already use commission pay structures for service advisors that comply with the above requirements under Section 207(i). This is because California imposes its own qualifying requirements for the commission sales exemption under Wage Order 7 that are similar to the requirements of Section 207(i) and most employment attorneys advising auto dealerships on pay plan structure create pay plans that are compliant with both state and federal law. Specifically, under Wage Order 7, Section 3D, commission salespersons who sell to the public (including service advisors) may be exempt from overtime if their earnings exceed one and one-half California minimum wage, and more than half of the employee’s compensation represents commissions from sales of services to the public.

It remains to be seen whether the dealership will petition the United States Supreme Court for review. But whatever the outcome of the case, it should have no bearing on California auto dealers because they are already required under California law to have in place a pay plan that comports with the second of the two available federal overtime exemptions (under Section 207(i)).

Although the sky is not falling and the service advisor overtime exemption is not lost, it is just as important as ever for dealerships to review their pay plans. Those dealerships that have service advisor pay plans and practices that do not comport with California law and have been relying instead on the automatic federal exemption, should contact a knowledgeable dealership employment attorney to craft a compliant pay plan and adopt compliant pay practices under both federal and state law.

[1] The converse is not true, because California law is more stringent in its exemption requirements and applicable definitions.

[2] A threshold criterion is that, “the employee is employed by a retail or service establishment (i.e., an establishment 75% of whose annual dollar volume of sales of goods or services (or of both) is not for resale and is recognized as retail sales or services in the particular industry.” But franchised retail automobile dealerships generally meet this criterion.