In Encino Motorcars, LLC v. Navarro, the Supreme Court was recently asked to determine if the Department of Labor could change its mind a second time whether car dealer employees selling service contracts were exempt from overtime compensation requirements of the Fair Labor Standard Act! (FLSA) In 1966 Congress enacted an exemption under the FLSA for overtime requirements at covered dealerships for “salesman . . . primarily engaged in selling or servicing automobiles.” In 1970, the Department interpreted this provision and issued regulations defining “salesman” to mean a salesman engaged in selling vehicles but excluded service advisors who sell repair and maintenance contracts. After several courts rejected this interpretation, the Department changed its policy in 1978 and allowed the application of the exemption to service providers. Unexpectedly, the Department issued a final rule in 2011 removing the exemption for employees selling service contracts which had been relied on by dealers for thirty-three years!
Unfortunately, one such dealer claiming the exemption was sued by service providers for violating the FLSA’s overtime provisions. After the dealer won at district court, the Ninth Circuit reversed claiming it was required to defer to the Department pursuant to Chevron U.S.A. v. Natural Resources Defense Council, Inc., 467 US 837. Chevron mandates that courts defer to a federal agency’s interpretation of a statute promulgated through notice-and-comment rulemaking if the agency’s interpretation is reasonable. Fortunately, the Supreme Court vacated the Ninth Circuit decision. It explained that the agency’s failure to explain the inconsistency in the application of a policy, e.g. the agency changing its mind, not once, but twice regarding the same regulation, renders the promulgation of the rule arbitrary and capricious, and not entitled to Chevron deference.
As such, the Supreme Court did not completely resolve this issue for the car dealership industry. It simply recognized that agencies cannot make sequential inconsistent changes in policy without explaining such changes. If they have not already, car dealers should at least prepare to follow the Department’s 2011 interpretation. Shulman Bastian Friedman & Bui LLP will continue to monitor and report developments in this case to its dealership clients.
If you have any dealership or employment related matter that renders it necessary for you to consider consulting with an attorney, please contact Shulman Bastian Friedman & Bui LLP at 949-340-3400 or at www.shbllp.com and ask to speak with one of our attorneys with experience in handling dealership and employment legal matters.