Service Advisor Overtime Exemption
Earlier this week, the United States Supreme Court issued its decision in Encino Motorcars v. Navarro, involving the issue of whether service advisors for car dealerships are exempt from overtime under the FLSA. While a narrow issue that affects only a limited category of employers, the Supreme Court's opinion on the issue is of broader interest because the Court rejected a Department of Labor regulation on the issue as unreasoned and not entitled to any deference. This is for good reason. For starters, the FLSA expressly provides for an exemption from the overtime compensation requirement for “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles” at a covered dealership. Based on the plain statutory language, the exemption would appear to cover service advisors (who sell repair and maintenance services). However, in 1970, the DOL issued a regulation stating that the term "salesman" only includes employees who sell vehicles, and not those who sell services. After several courts proceeded to reject the DOL's interpretation, the DOL in 1978 reversed itself, stating in an opinion letter and in its Field Operations Handbook that service advisors do, in fact, qualify for the statutory overtime exemption. Then, some 30 years later, in 2011, the DOL inexplicably (politically no doubt) reversed itself yet again, issuing a final rule returning to the 1970 position that only employees who sell vehicles qualify for the exemption.
Unsurprisingly, the DOL's about-face led to car dealerships being sued by their service advisors (who were suddenly deemed non-exempt by the DOL after decades of being deemed exempt) for unpaid overtime. One such lawsuit was brought against Encino Motorcars in California. Encino Motorcars moved to dismiss the lawsuit, arguing that its service advisors were properly classified as exempt and, therefore, did not have a valid claim for overtime. The district court agreed and dismissed the lawsuit. However, the Ninth Circuit reversed, deferring to the DOL's 2011 regulation stating that service advisors did not qualify for the exemption. Encino Motorcars successfully sought review by the Supreme Court.
This week, the Supreme Court issued its decision, reversing the Ninth Circuit's handling of the issue. However, the Supreme Court did not rule on the merits of whether or not service advisors qualify for exempt status. Instead, the Court simply held that the Ninth Circuit erred in relying on the DOL's 2011 regulation. The Court reasoned that the regulation was not supported by adequate reasoning for the DOL's shift in position and, as such, was not entitled to any deference. As such, the Court sent the issue back to the Ninth Circuit to reconsider without regard to the DOL's 2011 guidance. [This basically means that on remand to the Ninth Circuit, Encino Motorcars will win because without the 2011 DOL interpretation, there is nothing to support a finding of non-exempt status for the service advisors.]
The high Court's rejection of DOL interpretative guidance is significant because it serves as a reminder that DOL regulations will not be followed or afforded deference where they are arbitrary and unreasoned. It is possible that this same type of analysis will support legal challenges to other recent DOL about-faces -- e.g. its recently adopted Persuader Rule, discussed below.
Persuader Rule
As we have previously reported on this blog, the DOL recently finalized its Persuader Rule, newly requiring the reporting of certain services provided by labor consultants and attorneys to employers, as well as requiring the reporting of the payments made by employers for those services. Prior to this new Persuader Rule being issued, there was a long-standing exemption from the reporting requirements for "advice" provided to employers by labor consultants and attorneys. In fact, the advice exemption is codified in Section 203(c) of the Labor Management Reporting and Disclosure Act. Since 1962, the DOL interpreted this provision to only require reporting of consultant/attorney services if the consultant/attorney engaged in "direct" persuasive communications with employees. If an employer hired consultants/lawyers to give the employer (managers, supervisors) advice regarding a union organizing campaign or collective bargaining, no reporting was required as long as the employer was free to review, revise, and/or reject the advice.
Even though the statutory advice exemption set forth in the LMRDA has not changed, the DOL's decades-long interpretation of it has now changed. Effective July 1, 2016, the DOL's new Persuader Rule requires employers and their consultants/attorneys to broadly report not only "direct" persuasive activities of an employer's consultants/attorneys, but also "indirect" persuader activities, which the DOL's new rule broadly describes to include activities such as planning and coordinating persuader activities for an employer's managers and supervisors, drafting the substance of an employer's communications with its employees where the object is to persuade employees, and revising employer-created materials if the object is to enhance the persuasiveness of the materials (as opposed to merely ensuring the legality of the communication.
Within 90 days following the end of an employer’s fiscal year, employers are required to file a Form LM-10, disclosing the use of any persuader, including counsel, and providing the following information: (1) the date and amount of any reportable arrangement; (2) the name, address, and position of the individual with whom the arrangement was made; and (3) a full explanation of the circumstances of all payment made, including the terms of any agreement or understanding pursuant to which they were made.
Labor consultants/attorneys similarly will be required to file a Form LM-20 within 30 days of entering into a reportable engagement with an employer, disclosing: (1) the parties to the arrangement; (2) the object and terms and conditions of the arrangement; and (3) the activities that will be, or have been, performed pursuant to the arrangement.
The new rule further requires that any labor consultant/attorney who is required to file a Form LM-20 must also file a Form LM-21 within 90 days following the end of the fiscal year. Form LM-21, also known as the Receipts and Disbursements Form, requires the disclosure of all fees received from clients for “labor relations advice or services” whether or not the services rendered are related to persuader activity. The DOL is supposed to issue proposed rules concerning the specifics of the Form LM-21 requirements in the next few months.
Several lawsuits have been filed challenging the legality of the new Persuader Rule on various grounds. The Rule has yet to be enjoined, and this week the first of three courts to address the issues denied the plaintiff's request for a preliminary injunction to halt the rule from taking effect. In Labnet, Inc. v. U.S. Department of Labor, the Minnesota district court found that there was not a sufficient showing of irreparable harm needed to support a preliminary injunction. Notwithstanding the finding that a preliminary injunction was inappropriate, the court nontheless agreed that the plaintiff had demonstrated a probability of ultimately prevailing in proving that the rule is invalid as a result of being in conflict with the statutory language of the LMRDA.
In the meantime (pending possible court action in one of the other two lawsuits), the Rule is still slated to begin applying to agreements/arrangements entered into on or after July 1, 2016. Importantly, however, it is being widely reported that the DOL, in an email to the U.S. Chamber of Commerce, has confirmed that the new reporting requirements will not apply to agreements/arrangements entered into prior to July 1, 2016, even if the agreements are multi-year agreements and the services (and/or payments therefor) are provided after July 1, 2016. For this reason, employers should take immediate steps to take advantage of this grandfather exception by ensuring that they have adequate agreements in place with labor counsel prior to July 1, 2016 to cover such services going forward.
California Flexible Work Schedule Bill
We've previously reported about various employment-related bills pending before the California Legislature this session. One that we missed is SB 985 (Berryhill), which is dubbed the "Flexible Workplace Act" and would allow individual employees, with the approval of their employer, to work an alternative workweek schedule of up to 10 hours per day within a 40 hour workweek, without obligating the employer to pay the employee daily overtime. This bill was introduced as urgency legislation that, if passed, would take effect immediately. Although this bill would benefit both employees and employers alike, California's legislators have once again voted down the bill (the same thing they have done in recent years with similar proposed bills). On June 22, the Senate Labor and Industrial Relations Committee voted 4-1 against the bill (along party lines with four democratic Senators (Mendoza, Jackson, Leno, and Mitchell) voting against passage and one republican (Stone) voting in favor of passage. Although the committee has agreed to grant reconsideration of the bill, allowing it to be considered again in committee, it appears unlikely that the outcome will be any different.
Bill to Expand Parental Leave Rights for California Employees
On the bright side, also this week, California's Assembly Labor and Employment Committee voted against passage of SB 1166, which would have required employers with 10 or more employees to grant most employees the right to take up to 12 weeks of unpaid leave for purposes of bonding with a new child. In other words, the bill would have expanded the baby-bonding leave provisions of the FMLA/CFRA (currently applicable only to employers with 50 or more employees) to employers with 10 or more employees.
*For more information, please visit www.BeverlyHillsEmploymentLaw.com
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