Billions at stake as dealers ask state lawmakers to get paid more for warranty work

For nearly as long as there have been warranties, automakers and auto dealers have battled over factory reimbursements for warranty work.

But now, it appears that dealers have opened up a successful new front in their decades-long struggle — this time on the terrain of accommodating state capitols, where friendly legislators in some states are introducing amendments to franchise laws that mandate much higher payments for covered repairs.

So far, dealers have been successful in a handful of states, including Illinois, Wisconsin and Montana, but already the impact has been dramatic: nearly $250 million in additional payments sent to dealers in just the first year after manufacturers in Illinois were required to pay retail labor rates for service, according to an automakers umbrella group.

Now additional states — Colorado, California, Texas and others — are lining up to introduce similar changes to their franchise laws to close the gap between factory-pay and customer-pay repairs.

If this strategy spreads further across the map, dealers could realistically divert billions of extra dollars annually from automakers' bottom lines to their own already profitable service departments.

Dealers argue the added funds are needed to boost technician pay. But automakers see a naked grab for cash — at least some of which is likely to make it into dealers' pockets — and are unwilling to go down without a fight.

"The dealers have come here and asked you to write them a blank check," argued Jep Seman, a lobbyist testifying before a Colorado state senate committee on behalf of the Alliance for Automotive Innovation, the umbrella group representing almost all auto manufacturers in the U.S.

"The whole premise of the manufacturer-dealer relationship is the foundation of the [dealer franchise agreement] contract that we have, and every year that these state laws pass, we lose another piece of our contract and they gain more rights," Jeff Perry, director of public policy at General Motors, also testified.

Automakers contacted by Automotive News for individual comments on the warranty reimbursement trends declined to weigh in.

At the very core of their business model, franchised auto dealers in the United States are charged with selling and servicing the vehicles from their brand and/or automaker. It's an exclusive relationship, often described by dealers as a marriage between the franchised dealer and their brand.

For dealers, service departments have long been one of the chief financial engines of their business, usually providing enough money to pay at least a healthy chunk of overhead for running the entire operation, a concept known as fixed absorption. Though it varies widely by brand and location, warranty work comprises a significant portion of most franchised dealership service departments' repair orders, with most of the rest coming from "customer pay." The National Automobile Dealers Association says that, ideally, warranty and internal work — such as reconditioning used vehicles for future sale — in a service department should account for about 40 percent of a dealer's labor sales.

In other words, warranty work makes the factory one of, if not the, top customer for every dealer's vitally important service department. And historically, like any top-volume customer, the factory got a deal.

"The deal was, we promised that the dealer would get all of the warranty work, so they have a captured audience. And in exchange for all of that work — that can go nowhere else — they agreed to do the work at discounted rates, much as they would with any fleet customer," GM's Perry explained to Colorado state senators.

But dealers are having their own troubles in service, especially when it comes to training and maintaining sufficient numbers of technicians. Being able to pay technicians more usually means being able to retain them longer and keep service departments running, but with vast competition from independent shops for customer-pay work placing limits on the ability to pass those costs onto customers, the money has to come from either service profits or another revenue source.

Brian Maas, president of the California New Car Dealers Association and the 2023 chairman of Automotive Trade Association Executives, said dealers tried to address the time issue in a franchise bill in 2013, 2018 and 2019. "And here we are back in 2023, and the issue comes [down] to the manufacturers want to control how much time it takes for a dealer to do a job," he said. "But the job is the job and it takes what it takes and they should be paid in our mind the same amount that they charge retail customers to do the work."

Maas says the different pay structures are confusing and illogical. "So if a dealer is using a time guide and it's going to take two hours for the job to do it for a customer not under warranty, why should the same job magically take an hour if it's being done for a customer that happens to be the OEM? It just doesn't make logical sense."

It also can set up a weird dynamic within the service department itself, said Nissan Dealer Advisory Board Chairman Tyler Slade. Lower warranty reimbursement rates are causing technicians to cherry-pick customer-pay work, he said.

"We're seeing more and more of them just not wanting to do the warranty work because of the pay rate and book time," said Slade, operating partner at Tim Dahle Nissan Southtowne in suburban Salt Lake City.

Technicians avoiding warranty work because they don't think they are being paid fairly for the work required could cost dealers and automakers business.

"If we don't take care of customers on repairs, fixing it right the first time with competent technicians, then we're going to lose these customers," Slade said, adding that Nissan is working with its dealers to enhance warranty reimbursement rates.

But it can be more than just labor rates. Also key are competing time studies for how long a specific job takes to complete. All automakers conduct in-depth research on their repairs for their own vehicles, said Harold White, general manager of Robin Ford in suburban Philadelphia for the last nine years. White previously worked as a field service manager for Ford Motor Co. from 1973 to 2006, and is a Ford-certified technician.

"This conflict has been going on since I came on board in 1973," White said, explaining that manufacturer time studies are aggressive in accounting for each task in a repair, limiting reimbursable time for a technician, who either finishes the job in the alloted time or ends up working for free to do so. White used a recent recall to illustrate his point, saying that the recall takes a typical technician three hours to complete, and it's being reimbursed from the manufacturer at an hour-and-a-half of labor.

"Technicians know that they might lose on the first job," he said, while they familiarize themselves with the procedures involved. "They understand that. They know they're gonna get shortchanged someplace, but you're not gonna get a tech to take an hour-and-a-half loss on every job. That's not going to happen."

In 2021, the Illinois legislature passed a change in that state's Motor Vehicle Franchise Act that it called the "Multiplier Act," which removed the traditional time guide warranty compensation formula. The Multiplier Act mandates that automakers pay the same amount for a covered repair as a retail customer would. The change in warranty flat-rate time reimbursements amounted to a 50 percent increase per service operation.

Receiving bipartisan support in both houses of the Illinois legislature and signed into law by Gov. JB Pritzker in July 2021, the Multiplier Act went into effect Jan. 1, 2022.

"There is a shortage of mechanics, but this has really helped to retain them," said Joe McMahon, executive director of the Illinois Automobile Dealers Association, adding that his members say their technicians "no longer try to avoid doing warranty work" because of the reduced pay rate.

Volkswagen of America filed suit in federal court in December trying to get the Multiplier Act revoked as unconstitutional. Thus far, no other automaker has joined in that challenge, according to court records. Nor has theAlliance for Automotive Innovation.

However, a person briefed on internal deliberations on the issue among alliance members told Automotive News that the group had judged the chances of success on getting the law overturned on constitutional grounds as low. The person, who shared the information only on condition of anonymity, said alliance members were concerned that the "potential discovery burden" into automaker warranty practices would be overly "intrusive."

While dealers, technicians and their various representatives are happy with what the Multiplier Act has done, at least one group isn't.

The Illinois Manufacturing Association cited the law as one reason why the state thus far has been unsuccessful in winning any of the new battery plants being built around the nation on behalf of various automakers.

The association, using a figure provided by the Alliance for Automotive Innovation, estimated the cost of the legislation to manufacturers in the state at $249 million and counting.

The Illinois Automobile Dealers Association did not dispute the figure.

"We're protecting this law," McMahon told Automotive News. "Our dealers love it, their mechanics love it. And we haven't heard one downside."

State franchise laws change regularly to deal with issues of all kinds, but in 2018 Colorado amended its law to take a first crack at the warranty reimbursement issue, putting in place a complex procedure by which dealers could seek higher levels of compensation for warranty work. But a compromise reached with the manufacturers at the time created what has amounted to a glass ceiling on rates, said Tim Jackson, CEO of the Colorado Automobile Dealers Association.

"We knew in 2018 that it was a provision that we really didn't want to accept, but we did accept it as a compromise. As a result of 2018, our dealers got increases largely across the board. But now we're in this period of inflation, our dealerships are having trouble hiring and retaining techs," Jackson said, pointing to Colorado's high cost of living as a driving factor.

That brought the Colorado Automobile Dealers Association back before the legislature for another stab at increasing rates. In late January, a bipartisan group of legislators introduced a new amendment, removing much of the complex procedure put in place in 2018 and mandating instead that the manufacturer "must pay the retail labor rate multiplied by the applicable time allowances prescribed in the labor time guide used by the dealer."

The proposed new legislation is still in committee in the Colorado legislature, but its impact could be dramatic, said Matthew Tynan, whose family owns Nissan and Volkswagen stores in Aurora, Colo. Tynan said that had the legislation been in place in 2022, his two stores would have generated an extra $308,980 in revenue from service.

He listed four of his experienced technicians by name, saying they "benefit when we have increased revenue, because not only does their pay go up, but the culture, the treatment, the training and the tools we provide enhance their ability to make a better living and have a better lifestyle," Tynan testified. "Because these aren't just jobs, these are careers."

The Colorado bill's fate remains uncertain. While it was voted out of its first committee appearance without changes, the vote was split, and its sponsors said they remain open to compromises with manufacturers that, thus far, would prefer it simply go away.

"This bill is an unreasonable attempt to force manufacturers to overpay dealers for warranty," said Nick Steingart, director of state affairs for the Alliance for Automotive Innovation. "It would force automakers to pay Colorado auto dealers millions of dollars in unnecessary fees every year. It's unnecessary, unfair and creates substantial costs that will ultimately hurt consumers in the state of Colorado."

Lindsay VanHulle and Urvaksh Karkaria contributed to this report.