Authored by Alex Passantino

It’s the week before Christmas; ’16’s nearly done.
As we sit back and ponder the Year of 541.
The journey’s been long; it’s taken some time.
What’s happened thus far? Let us tell you in rhyme.

As the year drew anew, we sat with breath bated,
While within DOL they discussed and debated.
Should we take our proposal and set it on fire?”
“Take the percentage of time test and set the bar higher?”

“No, we meant what we said and we said what we meant,
We’ll still increase the salary, but we’ll change the percent.”
“Messing with duties will cause us nothing but trouble,
So just take the old salary, and make the new one be . . . double.”

From the moment it published, the rule came under attack.
Even Congress started plotting to take it all back.
But summer it came, then autumn did too.
And raises or OT would be in on 12/2.

With communications all drafted . . . maybe one last correction,
The narrative changed with November’s election.
Might the rules be undone by a Trump Administration?
Or would December’s due date cause such plans great frustration?

We considered . . . while preparing for our Turkey Day function,
When a court in East Texas stopped the rules by injunction.
A week before kickoff. For some ‘twas too late.
For others, they scooped up their plans and yelled “Wait!”

With more motions, appeals, and attempts to intervene,
We look at it all and ask “What does this mean?”
There’s gossip, speculation, and some wack-a-doo theories.
Apropos for a year when the Cubs won the Series.

We’ll know when we know, maybe a few days before.
More excitement is what ‘17 has in store.
But before we look forward, we’ll take one last look back.
Because wage-hour issues this year did not lack.

Some employers may feel there’s less cause for concern
When facing a lawsuit filed by an intern.
And as they consider which students their program will host,
Pay special attention to who benefits most.

California, of course, continued its wage-hour saga.
Whether sitting or standing or some thing they call PAGA.
And if plaintiffs have no trial plan, make sure you get your shots in,
Before calculating piece rate using IBM’s Watson.

Turning back east, we recall how DOL’s year went,
Beginning with January’s missive about joint employment.
A description of vertical and horizontal relations,
Should it “meet with an accident,” there’ll be standing ovations.

Spring brought a trip to SCOTUS for the service advisor.
DOL changed the reg; its explanation? “We’re wiser.”
But for positions the agency has held very long,
The Supremes told the Department “Hey, you’re doing it wrong.”

The rest of the year deserves more time to expound.
From exempt underwriters to permission to round.
And here’s hoping that someday the world will just get it,
And create a singular rule that involves the tip credit.

Decertification. Half-time. Franchise compliance.
A wide breadth of issues that appear with reliance.
But the future’s a mystery, so with great anticipation,
Happy New Year, and Thank You — Love, wagehourlitigation.

SDFLAuthored by Christopher Kelleher and Noah Finkel

Seyfarth Synopsis: Federal court denies motion for conditional certification for a proposed class of employees working at separate Subway franchises.

Earlier this year, the DOL’s Wage-Hour Division issued a much-publicized Administrator Interpretation on what employers constitute joint employers, including an explanation of how two or more employers under common ownership can constitute “horizontal” joint employers.  As articulated by the WHD’s sweeping pronouncement, it appeared that virtually any jointly-owned entities might constitute joint employers, at least in the eyes of the WHD.

But in a victory for employers in the battle over joint employer status, a federal district judge in the Southern District of Florida recently denied a motion for conditional collective action certification for a group of Subway employees of different franchises with common ownership.  In Aguiar, et al. v. Subway 39077, Inc., Timothy E. Johnson, et al., plaintiff Yirandi Aguiar sought collective action certification for the overtime claims for all “Store Managers” working at approximately 38 Subway franchises owned and operated as separate corporate entities by Timothy Johnson in Southern Florida.

Applying the usual “fairly lenient standard” to determine whether conditional collective action  certification was warranted, the Court rejected Aguiar’s attempt to certify the collective on several levels.  First, the proposed collective was comprised of individuals employed by approximately 38 separate, non-party corporate entities.  Second, Aguiar only provided “Consent to Join” forms and affidavits from three individuals including herself, and thus failed to sufficiently show the existence of other employees who wished to opt into the action.

Third, and most significantly, even if Aguiar could satisfy these first two elements, the Court found that the putative plaintiffs were not similarly situated.  In making this determination, the Court noted that the individuals worked at separate corporate entities, and Aguiar did not show that she or other employees were authorized to sell or make sandwiches at any other of the 38 franchises.  Additionally, the franchises were spread throughout Southern Florida, and thus were not geographically concentrated.  And finally, Aguiar failed to provide information regarding a joint payroll department or joint supervision over the proposed collective action members.

This case demonstrates that even under the “lenient standard” described above, merely alleging common ownership over a number of franchises is not enough to show joint employment status or to obtain a broad conditional certification order.

Authored by Seyfarth’s Wage & Hour Litigation Practice Group

Late Tuesday afternoon, Judge Amos Mazzant of the United States District Court for the Eastern District of Texas issued an order enjoining the U.S. Department of Labor’s implementation and enforcement of the new overtime exemption rules that were set to go into effect on December 1, 2016. The court granted a motion for preliminary injunction filed by the attorneys general of 22 states, in which the states argued among other things that the new rules were unlawfully promulgated and would be likely to cause irreparable harm to the states that requested the injunction. The court also considered amicus arguments made by various chambers of commerce and trade associations, which filed a companion case asserting similar and separate grounds for overturning the DOL’s new rules. Although the court’s order leaves some room for confusion on this point, it appears to apply to all public and private sector employers nationwide.

Although an important and exciting step in the right direction, this is not the final word.

First, this is a temporary injunction. It contains strong suggestions of what the court might ultimately do with a final determination regarding whether to invalidate the new rules. It explains various reasons why the rules are unlawful. But, at this time, all of those reasons and the results they might ultimately justify are preliminary.

Second, unlike most pre-judgment orders, an order granting or denying a preliminary injunction is immediately appealable. On appeal, the appellate court applies an abuse of discretion standard. Generally speaking, a court abuses its discretion by (1) committing an error of law, such as applying an incorrect legal standard, (2) basing the preliminary injunction on a clearly erroneous finding of fact, or (3) issuing an injunction that contains an error in form or substance. There are aspects of the court’s order that the federal government might argue prove each of these points. But it is fair to say that the Fifth Circuit Court of Appeals, which is the court that would hear the government’s appeal, rarely overturns orders granting preliminary injunctions. Within the past several decades, it has done so very few times.

Third, if it does not win reversal of the district court’s order in this case, it is conceivable that the government would seek review by the U.S. Supreme Court. Even if the Court of Appeals were to reverse, the States and Associations could petition the Supreme Court for review. Given the current composition of the Court, a 4 – 4 decision would leave the Fifth Circuit’s decision intact, leaving open the possibility that other Circuits, when confronted with the issue, could rule differently. That would create a difficult dilemma for employers that operate in multiple states across the country.

Fourth, if the plaintiffs ultimately prevail in securing the court’s judgment that the DOL’s new rules are unlawful, the federal government will have another opportunity to appeal. With the passage of time necessary for the parties to litigate their respective positions through judgment and then to wind their way through the appellate process, it is hard to predict whether an appeal would actually follow. The new administration, its new Secretary of Labor, and its new Solicitor of Labor would likely have much to consider by that point. And this sets aside for the moment the possibility that the congress will successfully pass—and the new president will sign—a Congressional Review Act resolution, mooting the need for further litigation at all.

To put it simply, the court’s ruling on Tuesday creates a significant amount of uncertainty that is going to last for a while longer. And it begs the enormous question: What should businesses do in reaction to the court’s preliminary injunction?

Many businesses are very far along in their plans to comply with the new rules by December 1. Many have already begun their communications with employees whose pay or classification would be impacted because of the new rules. Some have already effected changes impacting those employees. Further, those businesses that had not taken steps to comply have employees who have almost certainly heard about the rules and have assumed they would soon receive raises or become overtime eligible.

In that light, the injunction—though heralded as a positive development for businesses—has the potential to create significant risk and disruption. A careful hand is required. Obviously there is much to consider and much more to do. But here is a deft starting point:

  • If changes are about to be made, consider whether they can be postponed while stakeholders decide what further steps should be taken. The decision whether to postpone changes and what further steps to take must account for any payroll, timekeeping, and human resources changes are in progress. Can those changes be stalled as well, without unacceptable costs and other business disruptions?
  • If communications are set to be distributed to employees who would be impacted by the December 1 rule, postpone them while stakeholders develop their next steps plan.
  • If changes have not been made but communications have been distributed or begun, consider whether a revised communication plan can be executed while postponing the changes that have not yet been made. Any revised communications plan should begin with the fundamental explanation that: A federal court in Texas has issued an order that makes it uncertain how the FLSA’s overtime pay exemptions apply to employees who would be impacted by the new rules that were to go into effect on December 1. Because of the court’s order, those rules will not go into effect as expected. To ensure that it is able to follow the laws that govern how employees are paid under the FLSA, the company has revised its plans and will be reporting back to you soon about how this will impact you.
  • If communications have been distributed and changes have been made, stop and consider carefully how to proceed. Because this is an extremely positive result achieved by the plaintiffs in Texas, some business may be excited to quickly undo the changes that they made. Caution and care are advisable.
  • Employees who have been reclassified from exempt to nonexempt status or who have received pay raises will have begun to acclimate to their new status and pay. An abrupt change could cause them to seek assistance from a plaintiff’s lawyer, and could open a Pandora’s Box of potential (hopefully unjustifiable) claims.

For businesses that have not done anything to prepare for the December 1 rule, keep your eyes and ears open for further developments.

Of course, these are also not the final words on how businesses should adapt their actions to the turbulence that this otherwise positive court ruling could cause. What is important is that business stakeholders consider carefully what their next steps will be and to weigh carefully the costs and benefits of available options. A careful plan will help to avoid further business disruptions, unhappy workforces, and plaintiffs’ lawyers.

Capitol HillAuthored by Alex Passantino

As the nation waited for the final states to be called in the early morning hours on Wednesday, we here at the Wage & Hour Litigation Blog focused on our one thing:  what impact would the result have on the DOL’s overtime exemption regulations scheduled to go into effect on December 1, 2016?  How does the election of a Republican House, a Republican Senate, and President-Elect Donald Trump change what employers should be doing as we speed towards the December 1 deadline?

The short answer is that — at least for the near-term — employers should continue the same way as they have been, with a laser focus on being in compliance by December 1.

That being said, there are a couple of ways that the regulations can be stopped before December 1.  And there are a couple of others that may change the game after December 1.

The first path is through the Eastern District of Texas.  As we have reported previously, 21 states and dozens of trade associations filed separate lawsuits (which since have been consolidated) challenging the overtime exemptions rules on a variety of grounds.  A hearing on the states’ motion for injunctive relief is scheduled for next week, on November 16.  The trade associations are being permitted to participate as amici in the states’ case, and also have filed an expedited motion for summary judgment.  It is possible that the judge will enjoin the rules in advance of the December 1 effective date.  As is the case with most litigation, however, that result is less than certain.

A second pre-December 1 path to stopping — or at least delaying — the overtime exemption regulations is through Senator Alexander’s Overtime Reform and Review Act, S. 3464.  That bill would — by statute, not by regulation — increase the salary level to $692 per week on December 1, 2016, then increase it again in 2018, 2019, and 2020 until it hit $913/week.  The bill also contains special provisions protecting nonprofit, state and local government, and education employers from salary increases unless certain conditions are met.  Although the Senate has been expected to take up the bill upon return to Capitol Hill, the short legislative calendar and the threat of a veto by President Obama pose significant hurdles to relief before the December 1 deadline.

Once we get into 2017, there are additional tools at the disposal of Congress and a Trump Administration.  With the new salary level taking effect nearly eight weeks before Inauguration Day, however, there will be substantial political calculations involved in any use of those tools.

One tool is the seldom-used Congressional Review Act, a law that allows Congress to review and disapprove new agency regulations within prescribed time periods.  Congress could pass a “resolution of disapproval” of the new regulations that would have the effect of rescinding the rules.  Under the CRA, any regulation issued within the final 60 legislative days before Congress adjourns sine die is treated as having been issued on the 15th legislative day of the next session of Congress.  This allows the CRA resolution to be considered by the new Congress and, in this case, the new President, which makes it much more likely that the resolution will be successful.  Because the final 60 legislative days can be counted only in retrospect, the regulations that might be subject to this procedure are unknown.  An early estimate placed the “deadline” at May 16, 2016.  The overtime exemption rules were issued on May 23, 2016, which would place them within the review period.  Whether they actually fall within that period depends on how much Congress is in session over the coming weeks.  Assuming the overtime exemption rules fall within the relevant period, in the next session of Congress, and after January 20, 2017, President Trump could sign the CRA resolution, which would make it as if the rules never existed.

Finally, we could see rulemaking by the Trump Administration, such as a notice-and-comment rulemaking revising the salary level downward and/or eliminating the three-year automatic update provision.  Going through the notice-and-comment process would be time-consuming and likely would not result in any relief on the salary level until well into 2017, at best.

Ultimately, employers should continue their efforts to be compliant by December 1.  There are far too many variables at this point to conclude otherwise.

NYDOLAuthored by Robert S. Whitman and Howard M. Wexler

As we all know, the revisions to the FLSA’s “white collar” exemptions will take effect December 1 and will increase the salary level required for the executive, administrative, and professional exemptions to $913 per week (or $47,476 per year).  Avid wage and hour practitioners in New York have been waiting to see if the State DOL would propose a similar increase for exempt status under the NY Labor Law.

The wait is over.

On October 19, State DOL proposed amendments to its existing wage orders that would increase the salary threshold from the current $675 per week.  In keeping with the upcoming gradual increase in the State’s minimum wage levels, the proposal would raise the salary threshold in tiers:

Large Employers (11 or more employees) in New York City

  • $825.00 per week on and after 12/31/16;
  • $975.00 per week on and after 12/31/17; and
  • $1,125.00 per week on and after 12/31/18;

Small Employers (10 or fewer employees) in New York City

  • $787.50 per week on and after 12/31/16;
  • $900.00 per week on and after 12/31/17;
  • $1,012.50 per week on and after 12/31/18; and
  • $1,125.00 per week on and after 12/31/19;

Employers in Nassau, Suffolk, and Westchester Counties

  • $750.00 per week on and after 12/31/16;
  • $825.00 per week on and after 12/31/17;
  • $900.00 per week on and after 12/31/18;
  • $975.00 per week on and after 12/31/19;
  • $1,050.00 per week on and after 12/31/20; and
  • $1,125.00 per week on and after 12/31/21;

Employers Outside of New York City, Nassau, Suffolk, and Westchester Counties

  • $727.50 per week on and after 12/31/16;
  • $780.00 per week on and after 12/31/17;
  • $832.00 per week on and after 12/31/18;
  • $885.00 per week on and after 12/31/19;
  • $937.50 per week on and after 12/31/20

If these salary thresholds are adopted, the minimum requirement for exempt employees in New York will surpass the federal threshold of $973 at various points in time, the earliest on December 31, 2017 for “large” New York City employers.  However, the FLSA salary levels are subject to automatic revision every three years, beginning in 2020, based on the 40th percentile of full-time salaried workers in the region in which the salary level is lowest (historically, the South).

In addition to the increased salary threshold, the proposed Wage Orders also adjusts the amount employers can deduct for a uniform allowance and claim as a meal and tip credit in line with the gradual increase of the minimum wage toward $15.

While these are proposed amendments, we expect they will be implemented given that they track the forthcoming minimum wage increases.  The Department of Labor will receive public comments until December 3, 2016.  We will update you once the regulations become effective.

 

Authored by Alex Passantino

Seyfarth Synopsis: Two lawsuits related to the Department of Labor’s revisions to the white-collar exemptions have been filed in East Texas.

The first lawsuit, citing (among other things) the severe impact the impending salary increase will have on state and local government budgets, was filed by the Attorneys General of Nevada, Texas, and 19 other states (the “State AG case”). The State AG case makes a Tenth Amendment-based challenge to Congressional application of the FLSA to states. It also argues that the DOL exceeded Congressional authority with respect to the salary test, the highly-compensated employee exemption level, and indexing. The State AG case also argues that the DOL failed to follow the Administrative Procedure Act and/or that the Department exceeded its Congressional delegation of authority.

The second lawsuit was filed by a broad coalition of Texas and national business groups and trade associations. This case alleges that the DOL exceeded its statutory authority under the FLSA, both by the dramatic increase in the minimum salary level required for exemption and by the provision that would require automatic updating of that level every three years.

Both cases seek a variety of declarations regarding the unlawfulness of the DOL’s actions, as well as temporary and permanent injunctive relief preventing the rule from becoming effective on December 1, 2016.

The filing of these cases, as well as recent efforts in Congress to stop the rule (or at least to revise it), may tempt some employers into taking their foot off the pedal with respect to ensuring compliance with the new salary level by December 1. As many have learned the hard way, however, legislation and litigation are less-than-certain solutions.

Employers should continue their efforts to be compliant by December 1. If we receive legislative or judicial relief at some point, it will be much easier to stop the process than it would be to start it much closer to the effective date. In other words, Congressional or judicial relief should not be your compliance strategy.

We will, of course, continue to keep you updated on the litigation and legislative efforts. In the meantime, keep your eyes on the December 1 deadline.

Authored by Alex Passantino

Seyfarth Synopsis:  WHD is seeking to enter into compliance agreements with, among others, franchisors.  Whether an employer should take WHD up on their offer to sign on the line depends on a variety of considerations.

Expanding upon a relationship started in 2012, the U.S. Department of Labor’s Wage & Hour Division and Subway announced a voluntary compliance agreement earlier this week. Billed as an effort at increasing Subway’s social responsibility, the agreement details the steps WHD and Subway have decided will be mutually beneficial, including the following:

  • WHD will develop, with Subway’s assistance, compliance assistance materials for the franchise restaurant industry, which Subway will distribute to, among others, its managers and franchisees.
  • WHD will assist Subway in understanding the enforcement data related to its franchisees.
  • Subway will provide WHD with its annual disclosures to other government agencies, including the FTC.
  • Subway and WHD will explore options for franchisee compliance, including building alerts into the payroll and scheduling platform that Subway offers its franchisees.
  • WHD and Subway will meet quarterly to discuss franchisee compliance.
  • Subway may advise its franchisees of their obligations to comply with WHD’s investigative process.

In press releases and media statements accompanying the announcement, WHD Administrator David Weil revealed that WHD attempted to enter into similar agreements with other franchisors, and will seek to do the same in the future.

Should a franchisor—or any employer for that matter—enter into a voluntary compliance agreement with WHD? Ultimately, the answer to that question depends on a number of factors, and different employers likely will reach different conclusions. A couple of things to consider include:

Wage and hour compliance history. If the employer and its franchisees have had a solid compliance history—considering both WHD investigations and private lawsuits—there may be no need to invite WHD into the fold. If, on the other hand, there have been significant violation—particularly violations that have been publicly reported, it may be worth exploring. Media outlets reported that Subway’s franchisees had been investigated around 800 times in a three-year period, resulting in back wages of approximately $2 million. That type of negative publicity for the brand may have prompted the desire to reach an agreement to make every effort to ensure the brand and demonstrate “social responsibility.”

Joint employment. Entering into an agreement with WHD in which a franchisor takes additional responsibility for wage and hour compliance has the potential to be fraught with peril when it comes to joint employment. Although both Subway and WHD seem to insist that the agreement does nothing to shift the balance in any joint employment inquiry, whether it be under the FLSA, the NLRA, or any other law, it’s hard to see how the compliance agreement will not be used by parties seeking to establish joint employment. Indeed, another government agency (such as the NLRB) or a private plaintiff’s attorney is completely free to ignore WHD’s understanding of an agreement’s impact on joint employment.

Though it may be true in many cases that the agreement itself makes no changes to the analysis, in others it very well may. Presumably, entities at either end of the spectrum of concern—either those employers who are totally confident there will be no joint employment finding or those employers who believe the “cake is baked” on the issue—will be more likely to enter into an agreement. Those who are somewhere in the middle may be rightfully concerned that the agreement may be used against them to prove joint employment; at the very least, it will be one more item that needs to be explained away.

Other Benefits. It’s also possible that an employer’s participation in a voluntary compliance agreement with WHD can be used to help establish a good faith defense to liquidated damages, or to help oppose a plaintiff’s attempt to establish willfulness and a third year of damages. These efforts will necessarily be dependent on the nature of any alleged violation and its relationship to the agreement, but it would be difficult to paint an employer who meets with WHD regularly to discuss compliance, and who engages in the types of training activities contemplated by the agreement, as being reckless or indifferent to its obligations under the FLSA.

The decision to enter into a voluntary compliance agreement with WHD if presented with the opportunity—or to reach out directly to WHD to get the process started—is one that should be carefully and thoughtfully considered. It remains to be seen whether the Subway agreement will be the beginning of a trend or an isolated example of an employer willing to go where others are not. As additional agreements are announced and publicized, we will, of course, keep you posted.

Authored by Noah Finkel and Cheryl A. Luce

Seyfarth Synopsis: New decision from Northern District of Georgia rejects the DOL’s interpretation of the FLSA tip credit law. Holds that the FLSA does not regulate tips received by employees who are paid at least minimum wage.

Imagine that you are a restaurateur. You employ servers and bartenders who receive tips, but you pay them at least the minimum wage instead of the lower, minimum cash wage of $2.13 per hour. You are not taking a “tip credit” based on the tips your servers receive to bring them up to minimum wage. Instead, you’re directly paying the servers minimum wage (or more). If you reallocate the tips your servers receive, are you violating the FLSA?

Section 3(m) of the FLSA states that employees must retain all tips they receive if the employer takes a tip credit towards their minimum wage obligation. Prior to April 2011, courts held that Section 3(m) does not require employers to return tip money to employees if the employer does not take a tip credit. You, as the restaurateur, do not have to return tips your servers receive under the FLSA because you pay your them at least  minimum wage and the FLSA does not regulate your tip pool.

That was the case before the Department of Labor tried to regulate what the FLSA does not: tips received by employees who are paid at or above minimum wage. In April 2011, the DOL issued a rule that states, “Tips are the property of the employee whether or not the employer has taken the tip credit under Section 3(m) of the FLSA.” 29 C.F.R § 531.52. This DOL rule has been rejected by many district courts and the Court of Appeals for the Fourth Circuit, who agreed that the rule is not entitled to deference under Chevron or otherwise because the FLSA does not regulate tips of employees who are paid at least minimum wage. As we reported in February, however, the Court of Appeals for the Ninth Circuit went against the grain and upheld the rule in Oregon Restaurant and Lodging Association v. Perez. The Ninth Circuit concluded that because Section 3(m) is silent on whether employees who do not take a tip credit can reallocate tips received by employees, the DOL retained authority to regulate all tips, and the rule is reasonable and entitled to deference.

Recently, in Malivuk v. Ameripark, LLC, the plaintiff asked the Northern District of Georgia to adopt the Ninth Circuit’s approval of the DOL rule for valet attendants who received tips that were then reallocated by Ameripark to pay for overhead expenses. Ameripark argued that the DOL regulation is invalid under Chevron. The Northern District of Georgia agreed with Ameripark—and did not mince words in doing so. The court labeled the Ninth Circuit’s reasoning in Oregon Restaurant as “flawed” and stated, “The DOL Regulation violates the plain language of Section 203(m).”

Malivuk reaffirms that the DOL cannot exceed what the FLSA regulates. The FLSA regulates minimum wage and overtime pay, not wage payment like the laws of many states. If the DOL rule regulating tips received for employees who are paid at least minimum wage were to stay, it would fundamentally transform the FLSA into a wage payment law. The FLSA is not “silent” on how tips received by employees who are properly paid the minimum wage and overtime should be paid out; rather, the FLSA does not regulate these employees because it has no other remedies to offer them. The FLSA’s remedies are for payments below minimum wage and failure to pay overtime; it is not a wage payment law.

As the hospitality and other industries search for ways to share the tips collected by front-of-the-house employees like servers and bartenders with back-of-the-house employees like cooks, dishwashers, and janitors, the DOL’s far-reaching tip pool rule is an encroachment. Rulings like Malivuk allow employers to allocate tips in ways that suit their business needs.

 

Authored by Abigail Cahak

Seyfarth Synopsis: The Supreme Court dealt a blow to the Department of Labor’s rulemaking procedures, criticizing the agency for explicitly changing its long-standing treatment  of automobile service advisors as overtime exempt while saying “almost nothing” regarding the reasons for the abrupt change.

This week, the Supreme Court dealt a blow to the Department of Labor’s rulemaking procedures, criticizing the agency for explicitly changing its long-standing treatment  of automobile service advisors as overtime exempt while saying “almost nothing” regarding the reasons for the abrupt change.

The decision, echoing earlier criticisms of the DOL by the Court for taking new positions on who is and isn’t exempt in Christopher v. SmithKline Beecham Corp. when considering the exempt status of pharmaceutical sales representatives, may be of use to employers in challenging other recent DOL regulatory changes.

The Encino Motorcars Decision

Automobile service advisors employed by dealerships are generally responsible for meeting with customers, listening to their concerns about their cars, suggesting repair or maintenance services, selling new accessories or replacement parts, recording service orders, following up with customers as services are performed, and explaining repair and maintenance work when customers return for their vehicles.

The exempt status of such employees flip-flopped throughout the 1960s and 1970s; however, in 1978 the DOL issued an opinion letter specifically taking the position that service advisors could be overtime exempt under 29 U.S.C. § 213(b)(10)(A). The DOL confirmed this position nine years later when it clarified in its Field Operations Handbook that service advisors were to be treated as exempt. Finally, in 2008, the DOL issued a notice of proposed rulemaking stating that it intended to revise its regulations to reflect the overwhelming court authority on the matter and its own long-standing practice on the issue.

In 2011, DOL issued a final rule addressing service advisors, as well as a number of other issues on a broad range of topics.  Many of these reversed course from previous long-held DOL positions, including the DOL’s announcement that its 2008 proposal on service advisors would be rejected and the final rule would state the exact opposite: that service advisors are not exempt because they do not themselves sell automobiles.

In Encino Motorcars, LLC v. Navarro, the Supreme Court concluded that the Ninth Circuit improperly accorded Chevron deference to the DOL’s 2011 final rule in a suit alleging that the defendant dealership had improperly classified its service advisors. The Ninth Circuit had previously reversed, based on deference to the 2011 regulation, the District Court’s dismissal of the case as to the exemption of service advisors.

The Supreme Court started by noting that it must defer to a federal agency’s interpretation of ambiguous law if that interpretation is a “reasonable” one. But deference is not warranted when the agency does not give “adequate reasons for its decisions” and “where the agency has failed to provide even the minimal level of analysis, its action is arbitrary and capricious and so cannot carry the force of law.” This is particularly important where an agency is changing an existing policy and as such it must “provide a reasoned explanation for the change.”

Under these principles, the Court concluded that the Department’s 2011 regulation was not entitled deference because it offered “barely any explanation” for the change in interpretation. The Court stressed that “[t]he retail automobile and truck dealership industry had relied since 1978 on the Department’s position that service advisors were exempt from the FLSA’s overtime pay requirements” and had “negotiated and structured their compensation plans against this background understanding.” Therefore, “[i]n light of this background, the Department needed a more reasoned explanation for its decision to depart from its existing enforcement policy.” Accordingly, the Court vacated the Ninth Circuit’s decision an instructed it “to interpret the statute in the first instance.”

Potential Implications of the Supreme Court’s Decision

The Court’s ruling won’t have a direct impact on most employers — only a few employ automobile service advisors.  But its reasoning could have wide-ranging implications. The Court commanded that, when reversing course with new regulations, the DOL must show good reasons for the new policy. The automobile service advisor regulation was only one part of a 2011 series of regulations from the DOL in which the DOL changed its regulations, including several proposed interpretations on other FLSA issues from the DOL during the Bush Administration, including the tip credit, tip pooling, and fluctuating workweek.  To the extent the DOL’s explanation for the change is wanting, those changes are now subject to challenge.

Image for Promotion 06_16_16We have harnessed a number of special avenues to connect with you regarding the new overtime rule, including our FLSA Exemption Resource Center, a live Facebook interview with USA Today and our recent testimony before the U.S. House Education and the Workforce Committee.

Now, for our latest avenue: Twitter. For those who use Twitter to keep up with current events, join Brett Bartlett tomorrow, Thursday June 16, at 2:00 PM EST for a “chat” about the new FLSA exemption rule. Wage and Hour Division Administrator David Weil, Solicitor of Labor Patricia Smith, and Michael Hancock of Cohen Milstein will be joining him to answer questions focused primarily on the impact that the new rule will have on businesses nationally. You can join the conversation on Twitter using the hashtag: #OTRuleChat.

We look forward to your tweets!