On June 20, 2016, the U.S. Supreme Court decided the case of Encino Motorcars, LLC v. Navorro, which concerned the Fair Labor Standards Act (FLSA) classification of service advisors working at automobile dealerships. While the High Court did not actually decide the classification issue, it sent a strong message to the U.S. Department of Labor (DOL) that it “has some explaining to do” before it reverses its position and changes its interpretation regarding FLSA exemptions.

In Encino Motorcars, current and former service advisors of an auto dealership challenged their exempt FLSA classification and claimed they were entitled to overtime pay. The plaintiffs filed the lawsuit following a 2011 amendment to the FLSA regulations, in which the DOL reversed its prior interpretations and issued a final rule indicating that service advisors were nonexempt employees and, thus, entitled to overtime compensation.  For decades, the retail automobile and truck dealership industry had relied on the DOL’s prior position that service advisors were exempt from the FLSA’s overtime requirements. As a consequence, dealerships and service advisors had negotiated and structured their compensation plans based on the DOL’s long-standing position. 

Importantly, in 2008, the DOL issued a notice of proposed rulemaking regarding service advisors. The notice recognized that every court had found service advisors to be exempt under Section 213(b)(10)(A) of the FLSA (the dealership exemption). The DOL also recognized that the Department itself had treated service advisors as exempt since 1987. Thus, the DOL proposed to revise its regulations to make clear that the dealership exemption covered service advisors.

Despite its position in the 2008 proposed regulations, in 2011, the DOL announced that it was “not proceeding with the proposed rule.” Instead, the DOL issued a final rule that took the opposite position from the proposed rule. This new final rule interpreted the statutory term “salesman” in the dealership exemption to mean only an employee who sells automobiles, trucks, or farm implements – which typically would not include service advisors (according to the DOL). The DOL provided almost no explanation for the abandonment of its “decades-old practice” of treating service advisors as exempt.

In response to the lawsuit, the dealership filed a motion to dismiss arguing that, under applicable guidance, service advisors were covered under the dealership exemption. The U.S. District Court for the Central District of California agreed and granted the dealership’s motion to dismiss.  However, on review, the U.S. Court of Appeals for the Ninth Circuit gave controlling deference to the DOL’s 2011 regulations and held that service advisors are not covered under dealership exemption.

In its opinion, the Supreme Court “punted” on actually deciding the classification issue. However, it took issue with the process the DOL used to change its long-standing position. The majority refused to give controlling deference to the DOL’s 2011 amendments to the dealership exemption, because the DOL failed to adequately explain its change in position. The majority paid particular attention to the fact that the DOL had interpreted the law to exempt service advisors for decades. This long-held position created a reliance interest for employers that the DOL must take into consideration before changing its interpretation. 

Notably, the majority of justices agreed that this reliance interest required the DOL to provide more of an explanation for any change in position. According to the Court, “[o]ne of the basic procedural requirements of administrative rulemaking is that an agency must give adequate reasons for its decisions.” The DOL “must examine the relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made.”

Because the DOL failed to provide a reasonable explanation for its change in position, the Supreme Court refused to give deference to the 2011 regulations. According to the Court, “where the agency has failed to provide even that minimal level of analysis, its action is arbitrary and capricious and so cannot carry the force of law.” Although governmental agencies are free to change their existing regulations, they must provide a reasoned explanation for the change. Having invalidated the 2011 regulations regarding the dealership exemption, the Court remanded the case back to the Ninth Circuit for a decision that does not give controlling weight to the DOL’s 2011 regulations.

Employers awaiting a definitive ruling on the FLSA classification for service advisors may be somewhat dissatisfied with the Court’s opinion, as it does not squarely address that substantive issue. Dealerships will have to wait until the Ninth Circuit readdresses the issue (and perhaps longer) for a more definitive decision regarding service advisors’ status under federal wage and hour laws. Nonetheless, Encino Motorcars sends a strong message to the DOL. The Department is not empowered to arbitrarily change its position on the status of workers under the FLSA. Given the employers’ reliance on prior guidance, the DOL must provide a sufficient explanation for changing its position, and a reasonable time period to respond to any such change.

This case also serves to remind employers that not all actions taken by governmental agencies will be upheld by a reviewing court. Governmental agencies owe certain duties to the public, including employers, and cannot arbitrarily change the rules.