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Encino Motorcars: Positive FLSA Implications for Employers

By James M. Kalny

On April 2, 2018, in Encino Motorcars, LLC v. Navarro, No. 16-1362 (Encino), the Supreme Court of the United States ruled in a 5/4 decision that auto dealer employees who set up service appointments (Service Advisors) are exempt from the Fair Labor Standards Act (FLSA). While the specific holding of Encino is limited to the auto dealer industry, the analysis applied by the court was directly at odds with a pro-employee rule used by the courts for the last 40 years. This new interpretation has favorable implications for employers.

The FLSA requires employers to pay overtime to employees who work more than 40 hours in a week (hourly employees). When classifying employees as hourly or exempt under the FLSA the default is to hourly. Only where there is an express exemption spelled out in the FLSA that applies to the employee can an employee be exempt from the overtime requirement. Most employers are familiar with the white collar exemptions (Administrative, Executive or Professional employees) but there are several others. The exemption at issue in Encino (29 U. S. C. §213(b)(10)(A)) excludes “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, trucks, or farm implements….” from FLSA coverage.

Several service advisors for Encino sued for back pay, alleging that petitioner violated the FLSA by failing to pay them overtime. The employees relied on Department of Labor (DOL) written guidance that concluded that Service Advisors were non-exempt employees. They also argued that the FLSA exemptions should be read against the employer. The trial court rejected the DOL interpretations as unreasonable and determined that the Service Advisors were exempt under 29 U. S. C. §213(b)(10)(A).

The Ninth Circuit Court of Appeals reversed the trial court deferring to the DOL Occupational Outlook Handbook to assist it in interpreting the term Service Advisor. The Appeals Court followed the well-established analysis that FLSA exemptions are to be narrowly construed:

We find Defendant’s expansive interpretation particularly implausible in light of the longstanding rule that the exemptions in § 213 of the FLSA “are to be narrowly construed against the employers seeking to assert them.”

The Supreme Court reversed, basing its conclusion on a “best reading” of the statute’s text. The Court concluded that that a Service Advisor is obviously a salesman based on the ordinary usage of that term as defined in two commonly used dictionaries: “someone who sells goods or services,” and that Service Advisors are also “primarily engaged in servicing automobiles”. The Court also reasoned that although Service Advisors do not physically repair automobiles, they do spend their time “servicing” automobiles because they are integral to the servicing process.

Most importantly, the Supreme Court directly rejected the long held premise that exemptions to the FLSA are to be narrowly construed. The Court pointed out that the FLSA exemptions are just as integral to the statute as are the overtime and minimum wage requirements and are therefore entitled to fair consideration.

For over 40 years the narrow construction of the FLSA set the rule that employee non-exempt status was not available unless the employer could demonstrate that an exemption “plainly and unmistakably” applies. Where a DOL rule or definition directed the narrow interpretation of an exclusion, the pre-Encino courts would often defer to the rule without much consideration or analysis. That is not the case now. The courts are directed to give a fair interpretation of the exemptions considering plain words. The playing field has been leveled.

Now all employers may be better able to persuade courts that employees fall within overtime exemptions because employers must merely show that their reading of the exemption is more consistent with the statutory and regulatory text, rather than showing that the exemption must have been intended to apply.

As the Supreme Court mentioned, there are over two dozen exemptions under the FLSA. The most common are the administrative, computer, executive, highly compensated, creative professional, learned professional, teaching professional and outside salespeople. In the past when classifying employees as hourly or exempt, the analysis was skewed by the requirement that FLSA exemptions “are to be narrowly construed against the employers seeking to assert them.” As that is no longer the case, employers can now take a more reasonable approach to the classification analysis.

The Encino analysis is by no means an open door to moving employees from non-exempt to exempt because there is still the need to establish that there is persuasive, reasonable support for the application of the exclusion. From this point forward, however, classifying employees for FLSA purposes should be done under the more relaxed Encino standard. Evaluating new positions and any reorganizations should also be constructed and classified with an eye to the new “best reading” standard.

This article will appear in the May edition of The Business News.