U.S. Supreme Court Changes Course on 70 Years of Federal Overtime Law

A recent United States Supreme Court decision has changed the game in interpreting whether employees are exempt from overtime requirements.  For more than 70 years, the Court has interpreted exemptions to the Fair Labor Standards Act (“FLSA”) narrowly.  The FLSA is a 1938 law that requires employers to pay overtime to certain employees who work more than 40 hours in a week.  There are many categories of employees who are exempt from this requirement.  The Court, however, has long-held that such exemptions should be construed narrowly with an eye towards the payment of overtime.  On April 2, 2018, the Court departed from this principal. 

In Encino Motorcars, LLC v. Navarro, 138 S. Ct. 1134 (2018), the Court held that the specific employees at issue—service advisors at an automobile dealership—were exempt from the FLSA overtime requirement.  While this ruling has an immediate impact on the auto industry and the plaintiffs in the case, the Court’s holding carries much more far reaching consequences in the future interpretation of exemptions to the federal overtime requirement.

The case involved the question of whether a “service advisor” was exempt under 29 U.S.C. § 213(b)(10)(A), which applies to “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, trucks, or farm implements.”  Service advisors interact with customers and sell them services for their vehicles.  They meet customers, listen to their concerns about their cars, suggest repair and maintenance services, sell new accessories or replacement parts, record service orders, follow up with customers as the services are performed, and explain the repair and maintenance work when customers return for their vehicles.  Congress initially exempted all employees at car dealerships from overtime requirements, before enacting a more limited exception in Section 213(b)(10)(A).  The Department of Labor initially grouped service advisors within the exemption, but in 2011 the Department reversed course and issued a rule that interpreted “salesman” to exclude service advisors.  See 29 CFR § 779.372(c).  That regulation prompted current and former service advisors to file suit against a California Mercedes-Benz dealership.  The District Court for the Central District of California dismissed the lawsuit, finding that service advisers were exempt from overtime requirements, but the Ninth Circuit Court of Appeals reversed, holding that service advisors are not exempt from the overtime requirement.  The dealership subsequently petitioned the Supreme Court for review.

On review, the Supreme Court reversed the Ninth Circuit and held that service advisors were exempt from overtime requirements.  The Court engaged in a plain reading of the statute and streamlined the question at issue to whether service advisors are “salesmen . . . primarily engaged in . . . servicing automobiles.”  The Court concluded that they are, because under the best reading of the text, service advisors are “salesmen,” and they are “primarily engaged in . . . servicing automobiles.”  Looking to dictionary definitions, the Court stated that service advisors are obviously salesman, and that they are also primarily engaged in servicing automobiles.  Specifically, the word “servicing” in this context can mean either “the action of maintaining or repairing a motor vehicle” or “the action of providing a service.”  The Court stated that service advisors satisfy both definitions.  In coming to this conclusion, the Court rejected the statutory interpretation methodology utilized by the Ninth Circuit who found service advisors covered by the overtime requirement.  The Court also rejected the Ninth Circuit’s reliance on a 1966-67 Handbook from the Department of Labor, as well as legislative history that was silent on the issue of service advisors.

Most importantly, in coming to its conclusion, the Court rejected the Ninth Circuit’s use of the “narrow construction” principle for FLSA exemptions.  The Court explained:

The Ninth Circuit also invoked the principle that exemptions to the FLSA should be construed narrowly … We reject this principle as a useful guidepost for interpreting the FLSA.  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.  The narrow construction principle relies on the flawed premise that the FLSA pursues its remedial purpose at all costs.  But the FLSA has over two dozen exemptions in § 213(b) alone, including the one at issue here.  Those exemptions are as much a part of the FLSA’s purpose as the overtime-pay requirement.  We thus have no license to give the exemption anything but a fair reading.

Navarro, 2018 WL 1568025, *6 (internal citations omitted).

Justice Ginsburg, writing for the four dissenting justices, disagreed with the Court’s construction of the exemption.  She maintained that the schedules worked by service advisors render the overtime exemption unnecessary and criticized the Court for rejecting the narrow construction principle without acknowledging that it unsettles more than half a century of precedent.

The most obvious impact of this decision is that service advisors at car dealerships are definitively exempt from the FLSA overtime requirement.  However, this decision has much more far reaching consequences for employers moving forward.  Before this decision, lower courts routinely invoked the narrow construction rule as an outcome-determinative factor in decisions regarding FLSA overtime exemptions.  The rule created a strong presumption that an employee was not exempt unless an employer could demonstrate the exemption unmistakably applied.  After the Court’s ruling in Navarro, this rule has no application in interpreting FLSA exemptions, and the prior case law applying the narrow construction rule can no longer be relied on.

If faced with a challenge in court, employers may be able to more easily establish that an employee is exempt from the overtime requirement by showing that a reading of the exemption is consistent with the statutory and regulatory text.  This is a far easier task than employers were previously faced with, as they were previously required to demonstrate the clear application of an exemption under a narrow interpretation.

It will be important to monitor the future application of this development in the lower courts to determine if courts will truly move away from a narrow interpretation of exemptions.  Courts may be tempted to retain aspects of the narrow construction doctrine, especially when the specific factual scenario may result in perceivably unjust result.  Thus, until there is a chance to observe trends in the lower courts, employers would be wise to carefully consider whether a particular employee falls within the statutory language of any exemption.  Even if such an employee is appropriately exempt under the new interpretation, hasty decisions on classification could still lead to costly and time-consuming litigation or loss of employees.  Employers should consult with an attorney prior to classifying an employee as overtime exempt to ensure that their decision will not be harmful to the company.

If you have any questions regarding this article, please contact its author, Jon Sacks, at 414-727-6291 or jsacks@mzmilw.com.

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