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Supreme Court Spotlights Employee Status: Exempt or Not?

Thousands of cases are appealed to the U.S. Supreme Court every year, but usually fewer than 100 get a full-blown hearing and ruling. One case that made it through in the current court term is Encino Motorcars v. Navarro. On the surface, this case looks at whether car dealer service advisors are exempt or nonexempt. But the larger issue affecting jobs of all kinds involves just how narrowly the relevant law — the Fair Labor Standards Act (FLSA) — can be interpreted when determining between exempt status and nonexempt.

The case was brought by service advisors at a Mercedes-Benz dealership in Los Angeles. They worked from 7 a.m. to 6 p.m. five days a week, which is well over 40 hours, and sought overtime pay for the difference.

Check the Fine Print

A careful reading of the FLSA reveals an exemption for "any salesman, 'partsman' or mechanic primarily engaged in selling or servicing automobiles" at a dealership. In this case, Encino Motorcars argued that the service advisors fell under that exemption. The service advisors countered that they were merely a "communications channel," not actual salesmen, and therefore not covered by the exemption.

When the appeals court first took on the case, the U.S. Department of Labor (DOL) was subject to Obama-era regulations which seemed to suggest that, in many situations, workers claiming to be nonexempt should be given the benefit of the doubt. On that basis, the appeals court upheld the service advisors' claims. But in 2016, the Supreme Court shot down those regulations.

After another round, the Supreme Court ruled on the side of the dealership. Even though the FLSA didn't precisely state that service advisors are exempt, the language made that clear enough, the court said. "A service advisor is obviously a salesman," and therefore exempt, the opinion states. There's nothing in the FLSA that declares that "its exemptions should be construed narrowly," therefore "there is no reason to give them anything other than a fair, rather than a 'narrow' interpretation," Justice Thomas wrote for the majority.

Thumb on the Scale

Even so, the ruling was close — 5 to 4. "By removing a heavy judicial thumb from the workers' side of the scales in FLSA exemption litigation, [Encino Motorcars v. Navarro] is likely to figure prominently in many pending and future exemption cases," according to one labor law expert.

Still, your goal is probably to avoid being the next Supreme Court test case. Even if you're ultimately vindicated, the legal bills alone are daunting. Since the Supreme Court is saying that the law doesn't precisely spell out an employee's classification status in every instance, you need to exercise some judgment.

Department of Labor Guidance

As a reminder, the basic categories of employees deemed exempt from FLSA overtime requirements fall under the executive, administrative, professional, computer, "outside sales" and highly compensated categories. Here's a streamlined set of standards for those job categories, courtesy of the DOL:

Outside sales:

  • The employee's primary duty must be making sales or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and
  • The employee must be customarily and regularly engaged away from the employer's place or places of business.

Executive:

  • The employee must be compensated on a salary basis at a rate not less than $455 (the figure for this and other job categories is undergoing review at the Department of Labor) per week;
  • The employee's primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
  • The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
  • The employee must have the authority to hire or fire other employees, or the employee's suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

Administrative:

  • The employee must be compensated on a salary or fee basis at a rate not less than $455 per week;
  • The employee's primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers; and
  • The employee's primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

Professional:

  • The employee must be compensated on a salary or fee basis at a rate not less than $455 per week;
  • The employee's primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character, and which includes work requiring the consistent exercise of discretion and judgment;
  • The advanced knowledge must be in a field of science or learning; and
  • The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

Creative professional:

  • The employee must be compensated on a salary or fee basis at a rate not less than $455 per week;
  • The employee's primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

Highly compensated:

  • Employees performing office or non-manual work and paid total annual compensation of $100,000 or more are exempt from the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests for exemption.

 

For each category, you can find more detailed standards at https://www.dol.gov.  And, stay tuned for possible changes in that $455 weekly salary threshold standard. If you have any questions on determining between exempt status and nonexempt contact us. 

 

 

 

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