U.S. Supreme Court vacates Ninth Circuit decision in Encino Motorcars LLC v. Navarro

Provides guidance on regulation interpretation—California dealers with California-compliant service advisor pay plans remain unaffected

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Yesterday, the U.S. Supreme Court (SCOTUS) vacated the Ninth Circuit’s decision in Encino Motorcars LLC v. Navarro. California auto dealers are likely to hear a lot about this decision today and this week as other law firms report on it. But we want to let you know that if you are a California auto dealership and you have service advisor pay plans that are compliant with California Wage Order No. 7 (like the pay plans we draft and recommend to our California auto dealer clients) and have compliant pay practices (like the pay practices we recommend to our California auto dealers), Navarro does not have (and never had) any impact on you.

Specifically, for an auto dealership to avail itself of the overtime exemption available for service advisors in California, the service advisor’s earnings must exceed one and a half times California’s minimum wage for every hour worked, and more than half of the service advisor’s compensation must consist of commissions from sales of services or goods.

Last March, in Navarro the Ninth Circuit decided that auto dealership service advisors did not qualify for the automatic overtime pay exemption under the Fair Labor Standard’s Act (“FLSA”). This decision was based in part on a 2011 Department of Labor (“DOL”) regulation, which interpreted the term “salesman” (used in the exemption) to mean only an employee who sells vehicles (and not service advisors). But this regulation changed a decades old practice of applying a broader definition for “salesman,” without providing any supporting reasoning for doing so.

Several other law firms that, like us, provide labor and employment advice and counsel and litigation services for auto dealers, reported that Navarro would bring a fresh wave of class action litigation against California dealers. This Chicken Little approach caused us to report the true facts concerning the scope and reach of Navarro, to avoid industry panic among California auto dealers.

Here’s the skinny. Much of the hoopla over the definition of salesman and the application of this exemption was unwarranted for two reasons: (1) many auto dealerships already used commission pay structures for service advisors, which meet a different federal overtime exemption under 29 U.S.C. Section 207(i); and (2) dealerships that are in full compliance with California law (specifically, Wage Order 7 - commissioned salesperson exemption) also already comply with the other federal overtime exemption. Accordingly, the Ninth Circuit decision and any subsequent SCOTUS decision would have no effect on California auto dealers who are already in compliance with California’s Wage Order 7.

If you are still reading (either because you are intellectually curious or you do not have California compliant service advisor pay plans), this part will be interesting to you.

In vacating the Ninth Circuit’s decision, the SCOTUS provided guidance regarding how the automatic exemption should be interpreted - stating that regulations not supported by adequate reasoning (such as the 2011 DOL regulation) are procedurally defective and not deserving of deference. Now it is up to the Ninth Circuit to interpret the meaning of 29 U.S.C. Section 213(b)(10)(A) (the automatic overtime exemption), and decide if it requires paying overtime to service advisors. This interpretive guidance is of great assistance to wage and hour practitioners, like us, because many legal issues that arise in this area have not been decided by a court of appeal and are informed only by regulatory guidance on the subject. Yesterday’s SCOTUS decision can be applied to provide greater certainty concerning wage and hour advice and may perhaps result in a change of thinking on some issues.

As for the future of Navarro, the Ninth Circuit will interpret only the Section 213(b)(10)(A) federal automatic overtime exemption and will have to do so without providing deference to the 2011 DOL regulation, leaving open the possibility that the Ninth Circuit will find for the auto dealer in that case. The other overtime exemption available under federal law (Section 207(i) – which is also consistent with California’s Wage Order No. 7) is not at issue in Navarro and will not be addressed by the Ninth Circuit in this case.

If you are one of the auto dealers who does not have pay plans or practices that are compliant with California’s Wage Order 7, you should immediately speak to an auto dealer employment lawyer to become compliant and avoid any negative consequences that could arise from a future potentially adverse opinion by the Ninth Circuit, as well as possible significant liability under California law.