U.S. Supreme Court Adopts a “Fair Reading” Standard for FLSA Exemptions

by Jennifer R. Yee and Joshua R. Woodard

On April 2, 2018, the U.S. Supreme Court issued its highly anticipated ruling in Encino Motorcars, LLC v. Navarro.¹ Marking the second time the case was heard by the Supreme Court, the Court held that automobile dealership service advisors are exempt from the overtime requirement under the Fair Labor Standards Act (FLSA). In so holding, the Supreme Court rejected the longstanding principle that courts construe FLSA exemptions narrowly and, instead, adopted a “fair reading” standard.

Background

In one of the FLSA’s lesser-known provisions, the law exempts from the overtime requirement “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, trucks, or farm implements, if he is employed by a nonmanufacturing establishment primarily engaged in the business of selling such vehicles or implements to ultimate purchasers[.]”²

In the 1970s, the U.S. Department of Labor (DOL) interpreted this exemption as not being applicable to “service advisors.” The courts took a different view and, as a result, the DOL followed suit and similarly opined that the position was exempt. The DOL’s position on this issue remained consistent from 1978 to 2011.³ In 2011, the DOL reversed course (again) and issued a regulation stating that service advisors were not “salesmen” and thus were not within the scope of the overtime exemption.⁴ Based upon the DOL’s position reversal, service advisors sued a Los Angeles-area car dealership and asserted they were nonexempt and entitled to overtime. The Supreme Court ruled that the DOL’s 2011 regulation was invalid and entitled to no deference and remanded the case to the Ninth Circuit for further consideration. On remand, the Ninth Circuit held that the service advisors were nonexempt and entitled to overtime. The car dealership appealed, the case went back to the Supreme Court, and the Court issued its recent opinion.

The Supreme Court’s Opinion and Rejection of Narrow Construction Rule

The Supreme Court held that “[b]ecause service advisors are ‘salesm[e]n . . . primarily engaged in . . . servicing automobiles,’ they are exempt from the FLSA’s overtime-pay requirement.”⁵ Writing for the 5-4 majority, Justice Thomas rejected the longstanding “narrow construction” principle for FLSA exemptions:

The Ninth Circuit … invoked the principle that exemptions to the FLSA should be construed narrowly. [Citation omitted]. We reject this principle as a useful guidepost for interpreting the FLSA. Because the FLSA gives no “textual indication” that its exemptions should be construed narrowly, “there is no reason to give [the exemptions] anything other than a fair (rather than a ‘narrow’) interpretation.”⁶

The prior standard effectively provided that, in cases where there was a “tie” over whether an exemption should apply, the tie would usually break in the favor of the employee. While it is unclear how courts will apply the new “fair reading” standard, it very likely will shift the classification analysis and bolster employers’ positions on FLSA exemption arguments.

What the Opinion Means for Employers

Regarding the issue presented, Encino Motorcars affects car dealerships by concluding that service advisors are exempt from the FLSA’s overtime requirement. However, the Supreme Court’s ruling is not so limited. The opinion is significant for all employers governed by the FLSA. Indeed, the Supreme Court’s rejection of the “narrow construction” and adoption of the “fair reading” rule likely will result in a lesser burden for employers claiming that an FLSA exemption applies, and likely will create more parity in the arguments between such employers and those employees who seek the FLSA’s overtime protections.