By Kate McGovern Torone, Editor

The U.S. Department of Labor (DOL) did not properly explain a regulatory change made in 2011, the U.S. Supreme Court has determined. The department issued regulations exempting car dealership “service advisors” from the Fair Labor Standards Act’s (FLSA’s) overtime requirements but those rules were not properly issued and therefore are not entitled to deference, the High Court recently ruled.

The 9th U.S. Circuit Court of Appeals— which covers Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington—held earlier this year that advisors must be paid overtime because they are not included in the law’s exemption for a “salesman, partsman, or mechanic primarily engaged in selling or service automobiles” (Navarro v. Encino Motorcars, LLC, No. 13-55323, (9th Cir. March 24, 2015.

The court determined that the workers did not fall under the definition of “salesman, partsman, or mechanic” included in DOL regulations. The rules state that:

• A salesman is an employee who is employed for the purpose of and is primarily engaged in making sales or obtaining orders or contracts for sale of the automobiles, trucks, or farm implements that the establishment is primarily engaged in selling.
• A partsman is any employee employed for the purpose of and primarily engaged in requisitioning, stocking, and dispensing parts.
• A mechanic is any employee primarily engaged in doing mechanical work (such as get-ready mechanics, automotive, truck, or farm implement mechanics, used car reconditioning mechanics, and wrecker mechanics) in the servicing of an automobile, truck or farm implement for its use and operation as such. (29 C.F.R. §779.372(c))

The employer had argued that the court should not defer to DOL’s interpretation because the agency has, at other times, expressed an opposite view. In a 1978 opinion letter, DOL said it considered service advisors “salesmen.” It also amended its Field Operations Handbook that same year to reflect the interpretation. The relevant regulations, however, were issued in 2011 and DOL specifically declined to exempt service advisors.

That change, however, does not mean that DOL’s regulations are unreasonable, the 9th Circuit said. As the U.S. Supreme Court explained in FCC v. Fox Television Stations, Inc., 556 U.S. 502 (2009), “an agency is permitted to change its position,” the court noted. “Consistent with Fox, the agency here expressly acknowledged that its position was contrary to its earlier opinion letter, and the agency rationally explained why, in its view, the court decisions to the contrary were erroneous.”

Supreme Court weighs in

The employer appealed and the Supreme Court reversed, finding that DOL had not properly explained the reversal. Agencies are free to change their existing policies but an unexplained inconsistency is a reason for finding that the regulations are arbitrary and capricious, the Court said.

“Applying those principles, the 2011 regulation was issued without the reasoned explanation that was required in light of the Department’s change in position and the significant reliance interests involved,” the high court said. “The industry had relied since 1978 on the Department’s position that service advisors are exempt from the FLSA’s overtime pay requirements, and had negotiated and structured compensation plans against this background understanding. In light of this background, the Department needed a more reasoned explanation for its decision to depart from its existing enforcement policy.”

DOL’s failure to provide a full explanation means that its rule is not entitled to deference, the court said, vacating the 9th Circuit’s ruling and remanding the case.