High Court Endorses Broader View Of FLSA Exemptions
By Vin Gurrieri
Law360 (April 2, 2018, 10:18 PM EDT) -- As part of its ruling Monday that auto service advisers are overtime-exempt under the Fair Labor Standards Act, the U.S. Supreme Court jettisoned half-century-old precedent that called for narrowly construing exemptions to the FLSA and likely made it easier for employers who claim exemptions to overcome legal challenges, attorneys say.
In a 5-4 decision authored by Justice Clarence Thomas, the high court ruled that employees at California auto dealership Encino Motorcars LLC who advise customers about repair work fall under an FLSA exemption that excludes "any salesman, partsman or mechanic primarily engaged in selling or servicing automobiles" from overtime pay.
As part of that ruling, the majority rejected the high court's longstanding principle that FLSA exemptions are to be narrowly construed against employers that are seeking to assert them and that their application should be limited to cases "plainly and unmistakably within their terms and spirit," instead creating a standard under which lower courts give those exemptions "a fair reading."
Jeffrey Brecher, head of Jackson Lewis PC's wage and hour practice, called the high court's shift a "very significant development," since the old standard meant that cases in which there was essentially a tie over whether an exemption should apply would usually break in employees' direction.
"If you read any exemption opinion over the last 50 years involving the lower courts or the circuit courts, you'll almost always see that canon of construction," Brecher said. "Although the holding of this decision interpret[s] one very narrow exemption to the FLSA, the decision is one of the most significant decisions on exemptions because it ends this narrow construction principle, which has been applied to every other exemption."
Alfred Robinson, co-chair of the wage and hour practice at Ogletree Deakins Nash Smoak & Stewart PC and a onetime acting administrator of the WHD, said there will be less of a burden going forward for employers who claim an FLSA exemption since it won't be construed against them in court, noting the Supreme Court decision essentially creates parity between those exemptions and the FLSA's minimum wage and overtime pay requirements.
"If they have equal footing and are all entitled to fair interpretation, I think that opens up some new arguments for applying these exemptions in a [broader] form than they have in the past," Robinson said. "It sounds almost like there's going to be some sort of balancing interest as opposed to narrowly construing it against employers. It will open up the possibility that employers will be able to apply exemptions where they haven't been able to in the past."
But plaintiffs' side attorney Michele Fisher of Nichols Kaster, PLLP noted that the high court's previous standard — established in a 1960 case called Arnold v. Ben Kanowsky Inc. — included the "plainly and unmistakably" language that isn't being replaced under the high court's new test.
"The Encino Motorcars decision today rejects 'narrowly construed' but does not eliminate the 'plainly and unmistakably' requirement. Nor does it change that the burden is on the employer to establish it is entitled to the benefit of an exemption," Fisher said. "Courts have always been required to give the FLSA a 'fair reading,' so as long as courts continue to apply the FLSA fairly, today's decision in this respect should have little impact on employees seeking to pursue their wages."
The long-running case began in 2012, when the service advisers sued Encino, which operates a Mercedes-Benz dealership, for allegedly violating the FLSA by paying them only commissions, even if they worked longer than the standard 40-hour workweek.
After the Ninth Circuit ruled that the service advisers could pursue those claims, the high court issued a 6-2 decision in June 2016 that directed the Ninth Circuit to reconsider the service adviser exemption issue without giving weight to regulations issued by the U.S. Department of Labor in 2011.
Those regulations — which had said service advisers were not exempt from overtime pay, a position that ran contrary to the DOL's earlier position on the issue — had been issued without adequate explanation, according to the 2016 decision.
On remand, the Ninth Circuit held for the second time that service advisers don’t fall within the FLSA exemption.
During oral arguments in January, Justice Neil Gorsuch was the only justice to raise the narrow construction issue when he asked Encino's counsel Paul Clement of Kirkland & Ellis LLP to address it. Clement responded by telling the justices that "it may be time to put that canon to rest," and subsequently offered various reasons for his position.
Jack Schaedel, co-chair of the labor and employment practice at Scali Rasmussen, a California boutique that represents companies in the automotive sector, told Law360 that the ruling's influence will be felt in all auto dealerships since each has a few service advisers that could fall under the exemption. But he too said the bigger impact will be in the new construction standard.
The new "fair reading" directive to lower courts, Schaedel said, will require them to take a holistic approach to determining whether any exemption applies, including looking at statutory language, the intent of the exemption and industry practice.
"Previously, the Ninth Circuit ruling in applying the narrowly construe standard was really putting its thumb on the scale and making it not impossible, but quite difficult for an employer to prove an exemption unless it explicitly stated that that person would be exempt in the [FLSA]," Schaedel said. "After the [oral argument], it was pretty likely that Encino was going to win, but we didn't anticipate that they would go so far as to include that part about the fair reading instead of narrow construction."
Attorneys who spoke with Law360 also offered a range of potential effects that the new construction standard might have on existing exemptions and how employers may stand to benefit.
Robinson highlighted the FLSA's so-called Section 7(i) overtime exemption for employees of retail and service establishments that get paid mostly on commission as one whose interpretation may be a likely candidate for getting revisited by lower courts.
Meanwhile, Paul DeCamp of Epstein Becker Green PC, formerly an administrator of the DOL's wage and hour division under President George W. Bush, said the ruling could impact exemptions such as those for executive, administrative and professional employees, which he noted are not defined in the statute and are instead defined through regulations.
Although the narrow construction rule generally pertains to interpretations of statutory text, DeCamp noted courts have nevertheless used it to analyze both the FLSA's text as well as regulations in cases where workers' eligibility for overtime were close calls. As a result, litigation involving interpretations of those regulations, like the white-collar exemptions, could be impacted in addition to statutory exemptions that are at all unclear.
"Every single exemption that is out there has potentially some gray area to it, at least at the margins," DeCamp said. "It's going to mean that the arguments made in litigation are going to be somewhat different now — the presumption is going to be somewhat different, [and] now it goes from there being a strong presumption of nonexempt status to it being back to in essence a preponderance status. ... I don't think this is going to affect an enormous number of workers, [but] I think this is going to change litigation about exemptions in the gray area."
But despite the shift in legal interpretation, Schaedel said employers — particularly those in states with pro-employee wage laws like California — shouldn't assume they can exempt anyone they want.
"California law still applies, and someone could be exempt under federal law but not exempt under California law," Schaedel said. "You always have to comply with the more stringent pro-employee policy."
Besides cases involving FLSA exemptions themselves, Littler Mendelson PC wage and hour co-leader Lee Schreter said Monday's Supreme Court ruling may make it harder for employees to pursue collective actions alleging they've been misclassified.
Courts oftentimes either certify a collective action or deny businesses summary judgment based on "that maxim that FLSA should be narrowly construed because of the remedial purposes" of the statute, Schreter said, noting they may have to revisit how they reach those decisions.
"I think this has the potential to be very significant depending on how the lower courts actually implement the Supreme Court's guidance on this," Schreter said. "I certainly the Supreme Court’s decision will be widely cited by defense lawyers in wage and hour cases."
