Q&A: Why Service Advisors Are Nonexempt in Certain States

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March 8, 2017—Just last week, the 9th U.S. Circuit Court of Appeals ruled that service advisors, in contrast to technicians, are not exempt under the Fair Labor Standards Act (FLSA). This means service advisors in the states under that circuit court are entitled to overtime pay.

The case stemmed from service advisors at a California Mercedes-Benz location sued the dealership in 2012 and alleged that they had been improperly characterized as exempt employees and should have been paid overtime compensation. If an employee shifts from exempt to nonexempt, it's a big deal, said Stephen K. Marmaduke, because it could mean shifting pay plans and scheduling at your shop.

Marmaduke, managing partner for Wilke, Fleury, Hoffelt, Gould & Birney, LLP (a lawfirm out of California), recently spoke about the difference between exempt and nonexempt employees at the annual California Automotive Wholesalers' Association (CAWA) Leadership Meeting. He spoke with Ratchet+Wrench to break down how this affects business owners and how they can cover themselves whether employees are exempt or nonexempt.


What is the key difference between exempt and nonexempt employees?

If they're nonexempt, then they’re paid on an hourly basis. Generally, exempt employees have to have some administrative or management responsibilities, so they’ll be considered exempt from the overtime requirements. It could go either way with service advisors. They don’t always supervise people.

So if a ruling passes in the 9th U.S. Circuit Court of Appeals, it doesn’t apply everywhere, right?

It’s interesting how the circuit courts work. The 9th Circuit has jurisdiction over the states it represents (South Carolina, North Carolina, Virginia, West Virginia and Maryland). That would mean whatever it decides makes it law for those states.

It is actually in conflict with the decision of the 4th and 5th circuits, which previously ruled that service advisors are nonexempt.

When that happens, you get these parallel legal authorities, which is one of the things that makes it so tough to manage for a business owner. Decisions in the 4th and 5th Circuits don’t apply to the 9th. So really it’s just about knowing what your regulations are.

Federal law is a little different, specifically with regard to how overtime is calculated in, say, California. In general, California is more stringent than the federal law, or more liberal, depending on what side of the coin you're on. And so, in California, you generally don’t have to look at federal law a great deal because California law is going to be what applies. It’s really a state-by-state case.

What are your recommendations for business owners if they find out employees they had previously treated as exempt are suddenly nonexempt? Does it affect pay plans or scheduling?

Let’s use a service writer, for example. Some of them may be working more than a 40-hour week. Maybe they come in on Saturdays to help out customers. If you have been treating them as exempt employees, meaning you’ve been paying them a flat salary and you’re not paying them overtime, and now they’re nonexempt, then they could retroactively have a wage claim for overtime—that can go back three years.

And if you've got multiple service writers, those hours add up, and that could be quite a bit of money. So you have the retrospective claim you’re worried about, and then going forward, you’re going to really have to clock them in and out to make sure they don’t get into an overtime situation—or if they do, you need to be aware of it.

How do you know which of your employees are exempt vs. nonexempt?

If you’re questioning if they’re exempt or nonexempt, they’re probably nonexempt. You need to look into it further.

What are the easiest ways for a business owner to do that?

Truly the easiest way is to call a lawyer. Or if you have an HR person, have them look into it. The frustrating thing is there are a number of rulings, both federal and state agencies that have ruled things that are very similar, but not quite identical.

In California, we have what we call wage orders, which are published by the Department of Industrial Relations, which is also the labor commission. And they set forth categories of exemptions for people in particular industries. So my first step, if I’m in the auto repair business, would be to look under the wage order applicable for auto repair businesses to find the category or workers I’m employing and see what the standards are for being exempt in that category.


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