Thanks to the Fair Labor Standards Act (FLSA), non-exempt employees are entitled to overtime pay after 40 hours of work in a workweek. This act also safeguards employees through baseline standards for minimum wage, and full-time and part-time status.
Through a principle called “narrow construction,” employees have had a presumption of non-exempt status (eligibility for overtime pay) unless their employer was able to demonstrate that an exemption plainly and unmistakably applied. On April 2, 2018, the United States Supreme Court rejected the principle of narrow construction, which it had applied to employee exemption status for several decades, in its 5-4 decision on Encino Motorcars, LLC v. Navarro et al.
The major effect of the ruling is that employers who haven’t felt confident in their ability to prove their employees qualified as exempt, may now feel more empowered to argue that their exempt status is consistent with the statute. This could lead to more employees being classified as exempt, and therefore unable to qualify for overtime pay. The decision is immediately applicable to service advisors at car dealerships, and has the potential to reshape FLSA practices for many other businesses.
History of the case
The exemption issue began in 1961 after Congress amended the FLSA to exempt all car dealership employees, but five years later, limited the exemption to “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles.” In 1974, Congress enacted the version of the exemption at issue here.
In 1978, the U.S. Department of Labor issued a formal opinion letter exempting service advisors from FLSA protections. Then in 2011, they reversed their opinion and stated that service advisors were not exempt because they do not personally service automobiles.
The respondents in the Encino case were service advisors at a Mercedes-Benz dealership in California who filed suit against the dealership under the FLSA for time-and-a-half overtime pay after working more than 40 hours in a week.
The 2018 Encino decision was the second time the Supreme Court heard the case.
In 2016, the Ninth Circuit Court of Appeals relied on the Department of Labor’s 2011 ruling when they issued their first decision that the exemption does not include service advisors, and then the Supreme Court remanded it. The Ninth Circuit Court arrived at the same decision after rehearing the case, and the Supreme Court reversed the decision with the 2018 Encino ruling.
In its decision, the Supreme Court held that the code does exempt service advisors from the FLSA’s overtime requirements because they are “salesmen primarily engaged in servicing automobiles.”
Justice Clarence Thomas noted in the majority opinion that the Ninth Circuit Court of Appeals had reasoned that exemptions to the FLSA could be narrowly construed, and he wrote that the FLSA should not be interpreted this way. Thomas wrote, “because the FLSA gives no textual indication that its exemptions should be construed narrowly, they should be given a fair reading.”
In the dissenting opinion, Justice Ruth Bader Ginsburg wrote, “In a single paragraph, the Court ‘reject[s]’ this longstanding principle as applied to the FLSA … without even acknowledging that it unsettles more than half a century of our precedent.”
Effects of the Encino ruling on overtime
The primary parties affected by the Encino decision are service advisors at car dealerships who are now conclusively exempt from the federal overtime requirement. The impact of Encino could be much broader, however, because courts had relied on the narrow construction doctrine for decades.
The rejection of narrow construction could have far-reaching effects on FLSA decisions in lower courts. Still, some courts may be inclined to withstand Encino, possibly through interpretations of exemptions under state law.