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A (Potentially Temporary) Win for Car, Boat and Farm Equipment Dealerships

By Robert J. Hingula

In an April 13, 2015 blog post, we discussed a Ninth Circuit ruling holding that the FLSA’s Dealership Exemption did not apply to individuals employed as service advisors. In Navarro v. Encino Motor Cars, LLC, the Ninth Circuit validated the Department of Labor’s 2011 regulations redefining the words “salesman,” “partsman” and “mechanic” to remove service advisors from the overtime pay exemption. The matter was appealed and heard by the United States Supreme Court earlier this year.

On June 20, 2016, the Supreme Court held that the DOL’s 2011 redefinitions did not follow the basic procedural requirements of administrative rule-making and, thus, should not be considered when determining whether service advisors are exempt under the FLSA’s dealership exemption.

In its decision, the Supreme Court recognized that when an agency is authorized by Congress to issue regulations and does so to interpret a statute, the interpretation receives deference if the statute is ambiguous and the agency’s interpretation is reliable. However, deference is not warranted when the regulation is “procedurally defective”—in other words, where the agency err by failing to follow the correct procedures in issuing the regulation. One procedural requirement is that an agency must give adequate reasons for its decision to change an interpretation. The Court stated that where an agency has failed to provide even a minimal level of analysis, its action is arbitrary and capricious and cannot carry the force of law. Agencies are free to change their existing policies and interpretations, but they must explain their changed position and must be cognizant of long-standing policies that have created reliance by various industries.

In this case, the DOL’s 2011 regulation removing service advisors from the Dealership Exemption was issued without any reasoned explanation for the change. Before 2011, and since 1978, service advisors had been included in the exemption by the DOL. The DOL did not provide a reasoned explanation for change in an almost 30-year-old regulation, the Supreme Court held that the 2011 regulation did not receive deference and should not be considered by courts when determining if service advisors meet the Dealership Exemption.

This ruling is important because the Supreme Court is explicitly requiring the DOL to provide detailed explanations when it changes its interpretations of the FLSA – interpretations that have been long relied upon by numerous industries.  

While dealerships may have a won this round, it may be short-lived. As the Court acknowledged, the DOL still has an opportunity to issue another regulation removing service advisors from the Dealership Exemption – and such a regulation may be given full deference if the DOL provides a sufficient rationale for the change. We will continue to monitor DOL actions following the Supreme Court’s ruling.