Supreme Court: Service Advisors are Exempt under the FLSA

Reversing the Ninth Circuit Court of Appeals, the U.S. Supreme Court ruled that “service advisors” employed by car dealerships are exempt from the overtime provisions of the Fair Labor Standards Act (“FLSA”). Encino Motorcars, LLC v. Navarro, No. 16-1362, 2018 WL 1568025 (U.S. Apr. 2, 2018) (“Encino Motorcars II”).

The FLSA requires employers to pay employees overtime compensation if they work more than 40 hours a week, unless the employee is exempt. One of the exemptions in section 213 of the FLSA covers “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, trucks, or farm implements….” 28 U.S.C. § 213(b)(10)(A).

After the U.S. Department of Labor issued a Final Rule in 2011 that service advisors were not exempt from the FLSA (29 CFR §779.372(c)), service advisor employees of a Mercedes Benz dealership in Los Angeles sued their employer for their unpaid overtime wages. The trial court ruled in favor of the employer, but the Ninth Circuit reversed. See Navarro v. Encino Motorcars, LLC, 780 F.3d 1267, 1271 (9th Cir. 2015) (“the regulatory definitions ‘limit[ ] the exemption to salesmen who sell vehicles and partsmen and mechanics who service vehicles.’ 76 Fed.Reg. at 18,838. Because Plaintiffs do not fit within any of those definitions, they are not exempt from the FLSA’s overtime wage provisions.”).

Following remand from the Supreme Court the first time (Encino Motorcars, LLC v. Navarro, –– U.S. ––, 136 S.Ct. 2117, 195 L.Ed.2d 382 (2016)), the Ninth Circuit again held that service advisors are not primarily engaged in selling or servicing automobiles, and are therefore not covered by the exemption. Navarro v. Encino Motorcars, LLC, 845 F.3d 925, 933 (9th Cir. 2017) (“we conclude that the phrase ‘primarily engaged in selling … automobiles’ encompasses only those who are actually and primarily occupied in selling cars, and we conclude that the phrase ‘primarily engaged in … servicing automobiles’ encompasses only those who are actually and primarily occupied in the repair and maintenance of cars. Because service advisors meet neither definition, the FLSA does not exempt service advisors.”). The Ninth Circuit reached its conclusion using a method of statutory construction called the “distributive canon.” Id. at 934 (“the most natural reading of the statute is that Congress intended the gerunds—selling and servicing—to be distributed to their appropriate subjects—salesman, partsman, and mechanic. A salesman sells; a partsman services; and a mechanic services.”).

In the most recent decision, the Supreme Court reversed again. Instead, the Court held that service advisors fall with the FLSA exemption because they “are ‘salesmen’ and they are ‘primarily engaged in … servicing automobiles.’” Encino Motorcars II,  2018 WL 1568025 at *5. In doing so, the Court also rejected the Ninth’s Circuit’s use of the distributive canon to interpret the statute, because, in the Court’s view, the exemption did not allow for one-to-one matching, i.e. there are three nouns (salesmen, partsmen, and mechanics) and two gerunds (selling and servicing). Id. at *6. Therefore, the Court found that “[t]he more natural reading is that the exemption covers any combination of its nouns, gerunds, and objects[,]” including “salesman … primarily engaged in … servicing automobiles.” Id. Accordingly, the exemption could also presumably cover “partsmen … primarily engaged in selling … automobiles” or a “mechanic primarily engaged in selling… automobiles.”

In dicta, which will potentially have ramifications for other FLSA cases, the Court also rejected the longstanding principle that the FLSA’s exemptions should be construed narrowly. Id. at *7 (“Because the FLSA gives no ‘textual indication’ that its exemptions should be construed narrowly, ‘there is no reason to give [them] anything other than a fair (rather than a “narrow”) interpretation.’” (quoting A. Scalia & B. Garner, Reading Law 214, 363 (2012)).

In dissent, Justice Ginsburg states that the Court’s decision rejects the longstanding principle of narrowly construing FLSA exemptions “without even acknowledging that it unsettles more than half a century of our precedent.” Encino Motorcars II, 2018 WL 1568025 at *12 n.7 (Ginsburg, J. dissenting). It is not clear from the opinion whether this one paragraph of dicta, which is not essential to the Court’s holding that service advisors are exempt from the FLSA, overruled the Court’s former statements in Arnold v. Ben Kanowsky, Inc., 361 U.S. 388, 392 (1960) (recognizing that “the Court [has] held that [FLSA] exemptions are to be narrowly construed against the employers seeking to assert them and their application limited to those establishments plainly and unmistakably within their terms and spirit.” (emphasis added)); Mitchell v. Ky. Fin. Co., 359 U.S. 290, 295 (1959) (holding that the principle of narrow construction of the FLSA’s exemptions is “well settled”); and A.H. Phillips, Inc. v. Walling, 324 U.S. 490, 493 (1945) (“Any exemption from [the FLSA] must therefore be narrowly construed” in order to carry out its “humanitarian and remedial” purposes).