April 17, 2016 01:00 AM

Overtime case goes from the service desk to high court

Dealers fear a flood of adviser back pay claims

Encino Motorcars LLC v. Navarro et al.

The Supreme Court will hear arguments Wednesday, April 20, in a case involving overtime pay for dealership service advisers. Here's how it made its way to Washington. September 2012: Hector Navarro, Mike Shirinian, Anthony Pinkins, Kevin Malone and Reuben Castro sue Encino Motorcars LLC, which does business as Mercedes-Benz of Encino. Their complaint alleges that Mercedes-Benz of Encino violated the Fair Labor Standards Act by failing to pay them overtime. January 2013: U.S. District Court for the Central District of California dismisses the suit, siding with earlier rulings by the 4th and 5th U.S. Circuit Courts of Appeals that service advisers are covered by an exemption that applies to “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles” at dealerships. February 2013: The service advisers appeal to the 9th U.S. Circuit Court of Appeals. March 2015: The 9th Circuit reverses the district court ruling, breaking with other appellate courts. September 2015: Encino Motorcars petitions the Supreme Court to review the 9th Circuit's decision. October 2015: The Supreme Court places Encino Motorcars LLC v. Navarro et al. on its docket.

Steven SzakalyChief economist, NADA

“You're just creating a lot of uncertainty in the industry and eliminating what was an excellent alignment of the economic interests of the consumers, the employers and the employees.”

Szakaly: "No positives"

WASHINGTON -- A shorthanded U.S. Supreme Court this week will take up the case of five dealership service advisers who sought overtime pay for their 55-hour workweeks, a dispute that could have big implications for dealerships and their compensation structures.

The question before the court is whether service advisers fall into the same category as dealership salespeople, mechanics and parts department workers, who are explicitly exempted from overtime pay requirements under the Fair Labor Standards Act.

Dealers and many courts have long understood the answer to be yes, and dealerships have structured their bookkeeping and compensation practices accordingly, with many paying service advisers on commission, according to the National Automobile Dealers Association.

But the Obama administration and a ruling by the 9th U.S. Circuit Court of Appeals have challenged that assumption.

"A salesman is an employee who sells cars; a partsman is an employee who requisitions, stocks and dispenses parts; and a mechanic is an employee who performs mechanical work on cars," the 9th Circuit said in its March 2015 decision, backing a 2011 U.S. Labor Department ruling on the matter. "Service advisors do none of those things; they sell services for cars."

If the Supreme Court agrees, many service advisers presumably would qualify for overtime pay under the Fair Labor Standards Act, which established the standard 40-hour workweek in 1938. According to NADA, service advisers work an average of 47 hours a week.

Such a decision would "upend" dealers' understanding of the law and create "widespread unanticipated liability and disruption" at dealerships nationwide, NADA said in a brief filed in the Supreme Court case.

It also could result in "hundreds of millions of dollars" in claims by service advisers seeking to recover back pay, said Steven Szakaly, NADA's chief economist.

Switching to an hourly wage system with overtime could encourage dealers to hire more service advisers with shorter work hours, leading to lower per-employee pay and higher turnover, Szakaly says.

"There's no positives," in applying the overtime law to service advisers, Szakaly said. "You're just creating a lot of uncertainty in the industry and eliminating what was an excellent alignment of the economic interests of the consumers, the employers and the employees."

The U.S. government says that fear is overblown. In a brief filed with the court, the Labor Department said service advisers could be covered by a separate overtime exemption for retail and service workers who derive more than half their earnings from commission and earn more than 1½ times the minimum wage.

According to NADA, service advisers earned $65,876 on average in 2014. The top 10 percent earned $99,164. The median U.S. household income was $53,657, according to the Federal Reserve Bank of St. Louis.

Auto dealerships have enjoyed special treatment under the labor standards law since 1961, when it was amended to exempt all dealership employees from the overtime pay requirement. A 1966 update removed the blanket exemption but retained exemptions for "any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles" at dealerships.

The dispute before the Supreme Court originated with five service advisers from Mercedes-Benz of Encino near Los Angeles, who sued the dealership in 2012 for refusing to pay them overtime.

In their complaint, the five said they were paid solely on commission and were "mandated" to work from 7 a.m. to 6 p.m. at least five days a week. They were also required to be "on call" during their lunch breaks and on vacation.

A California district court dismissed the case, citing the Fair Labor Standards Act's overtime exemptions. But the 9th Circuit reversed that decision, breaking with previous appeals court decisions dating to the 1980s and paving the way for the Supreme Court to settle the dispute. A ruling is expected this summer.

The vacant seat on the court raises the prospect of a 4-4 tie, which would keep things as they are: The 9th Circuit's ruling would apply only in its nine-state Western jurisdiction.