Want to know how to keep your automobile dealership compliant without losing employees? You’ve come to the right place. That colossal question was the theme of our recent webinar in which we explored how a dealership can create a culture of compliance without sending staff running off to pastures with less paperwork.
If you missed the webinar, or if you’d like to review what we discussed, you’ve come to the right place—again. Or maybe you haven’t left. Regardless, you’re here, we’re here, and the first installment of our webinar recap is below.
(We’d like to thank Steve Roppolo, Partner with Fisher Phillips, and Ophelia Yan of Compli’s HR Support Center, for sharing the following information, which we adapted from their words into this blog post.)
New Cases Raise FLSA Questions for Dealerships
For many years, automobile dealerships been operating under the assumption that pay plan changes are settled law. Dealers understand that certain employees are exempt from the Fair Labor Standards Act, which requires an employer to pay overtime and minimum wage. What you may not know is that dealerships have their own special exemption built right into the law: Section 13(b)(10).
Section 13(b)(10) lists salesmen, partsmen, and mechanics as exempt:
- The first category is simple. Sales people on the floor, selling vehicles, are exempt from both the minimum wage and the overtime requirements of the statute.
- Because they’re listed right there in 13(b)(10), we’ve always considered partsmen a no-brainer as well.
- The question of the other category, service advisers, has come up many times over the years, and many courts have taken the position that because service advisers are essentially selling service, they are the equivalent of salespeople—essentially, instead of selling automobiles, they’re selling your service department.
Legal disputes have complicated these conclusions somewhat. Circuit courts have been split on the third category, and the Supreme Court has decided to take up the issue in the case of Encino Motorcars, LLC v. Navarro. This is a critical case, and we will need to wait and see whether SCOTUS agrees with numerous circuits that service advisers can be considered exempt under Section 13(b)(10).
As we’re waiting for clarity on service advisers’ status, however, some district courts have begun tinkering with the partsmen exemption, suggesting that partsmen are not exempt unless they are doing something that relates directly to the service of automobiles. Anyone in the automotive industry knows partsmen don’t do that: they work the counter, sometimes stock requisition parts, and the Department of Labor has historically deemed that enough for an exemption. All they need to do spend the majority of their time handling the parts, the DoL reasons, and that makes them exempt.
Nonetheless, a couple of district courts in New York and Texas have taken a different view. Dealerships have found this development nerve-racking and questionable: Why would the statute specifically list partsmen if they were not exempt? Encino Motorcars may resolve this ambiguity, so keep an eye out for news about the case.
In addition to the new questions about Section 13(b)(10) exemptions, numerous dealers have recently run into issues surrounding pay plan changes and independent contractor status: Are the people performing services for your organization independent contractors, or should they be considered actual employees?
This question often comes up in regards to dealer trader drivers. Many dealerships, particularly dealerships in smaller towns, use a roster of retirees to run to auctions and handle other dealer trade tasks. A number of courts, as well as unemployment commissions, have deemed this practice improper.
To determine if your dealership has miscateorgized workers, you’ll need to look at the question of control:
- Who is actually controlling the employees?
- Is it the dealership or is it the outside contracting company?
- Does the individual you’re treating as an independent contractor have control over the hours of work, and how the job gets done? Are you just insisting upon the end result of the work?
The more freedom the individual has in performing their duties, the higher the likelihood they are indeed an independent contractor. But this is becoming rarer and rarer in the dealership context. It’s almost always safer and more conservative to treat everyone as an employee and make sure you’re complying with those employment laws.
What Should You Do?
How should you deal with these new uncertainties? First, at least for positions that would qualify, consider whether you want to take advantage of Section 7(i) overtime exemptions for commissioned employees.
Section 7(i) applies to any employee of a retail establishment who is paid by commission at least 50% of the time. Those employees might be service employees, for example. If service advisers don’t qualify for 13(b)(10), they might qualify for 7(i), as long as you’re paying them on a commission pay plan, and at least half of their take-home compensation is paid in the form of commissions.
Be careful to track their actual rate. As you take their hours and divide them into their pay, ensure that it at least meets the $10.89 per hour (time and a half federal minimum wage) requirement. If you operate in a location with a higher minimum wage than the federal minimum, you’ll need to adjust to comply the higher amount.
Finally, the individual must work at a retail establishment. That may sound like a given, but keep in mind that the DoL will call the call into question the retail status of any so-called retail establishment—including an auto dealer—if non-retail sales represent more than 25% of total revenue. In other words, if your dealership has a significant wholesale parts operation (e.g. fleet sales to a police department, federal government agency, or particular delivery company), your non-retail sales may surpass 25% of overall revenue, and your 7(i) options may be limited.
Regardless of how you classify your workforce, it is critical pay them correctly based on their classification, and using clear employee agreements. For instance, dealerships should communicate how commissions are earned and then when they’re paid.
Always communicate pay plans and any pay-related changes to employees in writing. Employers can never have enough documentation—not only for legal reasons, but also to stay transparent and assuage workers’ anxieties. When they hear that their pay structure is changing, many employees assume the worst: the employer is trying to take away their money, make their lives more difficult, or short them in some way, shape, or form. Keep this in mind and explain the positive aspects of your changes: Why are the changes taking place? How do they benefit employees? Transparency and candor can help build trust and lead to better compliance outcomes in the future.
Next up: employee accommodations, at-will relationships, and more. Check back soon for parts 2–4 of this series!