In March, the 9th U.S. Circuit Court of Appeals ruled that service advisors, in contrast to technicians, are “non-exempt” employees under the Fair Labor Standards Act (FLSA). This means that service advisors are entitled to overtime pay—though that does not apply to every state.
State laws on exempt and non-exempt employees differ, and that can make payment a little muddled for shops, says Stephen Marmaduke, managing partner for Wilke, Fleury, Hoffelt, Gould & Birney LLP. Often, shop operators overcompensate and end up paying an employee a lot more than required.
With some confusion over the changes to the exempt and non-exempt status of service advisors, shops are scrambling to adjust their payrolls. But, despite the differing state laws, shops can take the proper precautions to avoid potential legal issues.
Breaking Down the Case
The ruling came after service advisors at a California Mercedes-Benz location sued the dealership in 2012 and alleged that they had been wrongly characterized as exempt employees and should have been paid overtime compensation.
On appeal, the 9th Circuit in March reversed the district court's decision regarding the plaintiffs’ overtime claims because prior U.S. Department of Labor (DOL) guidance and regulations issued in 2011 supported a finding that service advisors are not covered by the exemption for mechanics and salespeople (Navarro v. Encino Motorcars LLC, 780 F.3d 1267 (9th Cir. 2015)). The dealership appealed the 9th Circuit's decision to the U.S. Supreme Court, which agreed to take the case.
The 9th Circuit Court of Appeals has jurisdiction over South Carolina, North Carolina, Virginia, West Virginia and Maryland. The ruling is in conflict with the 4th and 5th circuits, which previously ruled service advisors are non-exempt, Marmaduke says.
“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,” he explains. “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.”
Differences Between Exempt vs. Non-Exempt
To put it simply, the difference between exempt versus non-exempt employees is that non-exempt employees are paid on an hourly basis, while exempt employees must have some type of administrative or management responsibilities. With service advisors, Marmaduke says, this could go either way.
“Some of them may be working more than a 40-hour week,” Marmaduke says. “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 non-exempt, 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.”
Mary Kemnitz, CFO at D&H Enterprises in Concord, Calif., and a member of the Automotive Service Councils of California, says she pays her service advisors hourly with added incentive to reach team bonuses.
“Everyone in my shop qualifies for team bonuses, not just technicians,” Kemnitz says.
Part of her payment plan stems from how California’s minimum wage is always increasing, she says.
In states like California, shop owners won’t have as much trouble with federal laws due to their more stringent state laws, Marmaduke says.
“If they want to switch from exempt to non-exempt, then the employer should work out a fair compensation program,” Kemnitz says.
Kemnitz gives her employees a bonus once the whole team hits its numbers goal for the period.
One of the problems employers encounter is mistaking how much their insurance covers. Insurance does not cover lawsuits that arise from paying an employee incorrectly.
Preventing Potential Mishaps
Kemnitz checks her employees’ statuses on CalChamber, an informational site from the California Chamber of Commerce. This site is her go-to place for help for human resources.
“I really caution against employers classifying an employee as exempt,” Kemnitz says.
She would not pay her employees a salary unless that person was an owner and had been given a share of the stock in the business.
Marmaduke recommends people in the industry first take a look at wage orders issued by the labor commission and look closely at the standards set for their employees. Yet, he says the easiest way to clear up any confusion is to call a lawyer or talk directly to an HR person.
“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,” he says. “If you’re questioning if they’re exempt or non-exempt, they’re probably non-exempt. You need to look into it further.”