Supreme Court Rejects DOL’s Unexplained Change in Position

By Allen Smith, J.D. Jul 1, 2016

​​​Battle over whether car dealership service advisors are overtime eligible rages on. 

When it comes to changing a federal regulation, it's not simply a matter of out with the old, in with the new. Agencies must give reasons for changes, which can often make regulations lengthy.

Courts usually must defer to agency regulations, as long as they interpret ambiguous provisions of laws in a reasonable way. But courts do not have to defer to the Department of Labor's (DOL's) most recent rule that automobile service advisors are eligible for overtime pay under the Fair Labor Standards Act (FLSA) because the agency had flip-flopped on whether they are exempt without an explanation for the switch, the U.S. Supreme Court held June 20.

The Supreme Court did not actually decide whether service advisors are exempt; it merely ruled that the DOL's regulation was not entitled to deference in this instance and sent the case back to the lower court.

The decision "substantially narrows an agency's ability to change its interpretations, which frequently occurs when there is a change in administrations," said Rex Heinke, an attorney with Akin Gump in Los Angeles.

The ruling is "an important reminder to courts that federal agencies are not the final arbiters of what a law says or does not say," said John Doran, an attorney with Sherman & Howard in Phoenix. However, "because it is clear that the court is divided on the issue, it makes sense to play it safe for now and treat service advisors as nonexempt," he said.

"It is possible the 9th Circuit could again determine that service advisors are nonexempt, which could set up another round of review by the Supreme Court," noted Matthew Disbrow, an attorney with Honigman in Detroit. "Until the issue is resolved with some finality, HR professionals should be careful about how service advisors are classified."

Agency Flip-Flop

In 1966, Congress enacted an exemption from the FLSA's overtime compensation requirement for "any salesman, partsman or mechanic primarily engaged in selling or servicing automobiles."

A 1970 DOL regulation excluded service advisors from the exemption, reasoning that service advisors sell repair and maintenance services but not the vehicles themselves.

However, three years later, the 5th U.S. Circuit Court of Appeals rejected the DOL's conclusion (Brennan v. Deel Motors, 475 F.2d 1095 (1973)), and several district courts subsequently agreed with this holding. In 1978, the DOL issued an opinion letter stating that service advisors could be exempt, noting that its new position was consistent with court decisions.

In 1987, the DOL confirmed its 1978 opinion letter by amending the department's Field Operations Handbook to clarify that service advisors should be treated as exempt. The DOL acknowledged that its position represented a change from the 1970 regulation and said the regulation would "be revised as soon as is practicable."

Twenty-one years later, in 2008, the department issued a notice of proposed rulemaking, recommending a revision to its regulations to reflect existing practice by interpreting the exemption to cover service advisors.

But in 2011, the department announced it was not proceeding with the proposed rule. Instead, it issued a final rule that took the opposite position from the proposed rule and stated that "salesman" means only an employee who sells cars, trucks or farm implements. The DOL had come full circle and, as in 1970, was now—without explanation—switching back to treating service advisors as nonexempt.

'Unexplained Inconsistency'

In this case, five service advisors at Encino Motorcars, a Mercedes Benz dealership in the Los Angeles area, worked from 7 a.m. to 6 p.m. at least five days per week and had to be available for work matters during breaks and while on vacation. They sued in 2012, claiming that the dealership violated the FLSA by failing to pay them overtime compensation.

The district court ruled that they were exempt, but the 9th Circuit reversed and held they were not exempt, relying on the DOL's 2011 regulation.

The Supreme Court vacated the 9th Circuit ruling. "The 2011 regulation was issued without the reasoned explanation that was required in light of the department's change in position and the significant reliance interests involved," the court stated, adding that the DOL "offered barely any explanation" for the switch.

For decades, dealerships structured their compensation plans in reliance on the department's 1978 position that service advisors are exempt, the Supreme Court noted. "A summary discussion may suffice in other circumstances, but here—in particular because of decades of industry reliance on the department's prior policy—the explanation fell short of the agency's duty to explain why it deemed it necessary to overrule its previous position," the court stated.

"An unexplained inconsistency in agency policy is a reason for holding an interpretation to be an arbitrary and capricious change from agency practice," the Supreme Court added. "An arbitrary and capricious regulation of this sort is itself unlawful" and is not entitled to courts' deference.

This case is Encino Motorcars v. Navarro, No. 15-415.


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