By:  Matthew Simpson

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Dealerships will soon get a decisive ruling from the U.S. Supreme Court about an issue that has become a thorn in the side for many dealers. The issue: whether Service Advisors are exempt from overtime requirements under Section 13(b)(10)(A) of the Fair Labor Standards Act (FLSA), which exempts “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, trucks, or farm implements, if he is employed by a nonmanufacturing establishment primarily engaged in the business of selling such vehicles or implements to ultimate purchasers.”

History Of The Continuing Controversy
Historically, the “salesperson” exemption has included Service Advisors. Beginning in 1973 with a federal appellate decision in Brennan v. Deel Motors, Inc., and continuing as recently as 2013 with the Montana Supreme Court’s decision in Thompson v. J.C. Billion, Inc., courts have uniformly held that Service Advisors are exempt from overtime under Section 13(b)(10).

However, the U.S. Department of Labor’s (USDOL) track record in this area has been inconsistent. At times in the past, it has said that Service Advisors could qualify for the exemption; at other times, it has said that they could not. At one point, USDOL issued an interpretive provision where it took the position that Service Advisors did not fall within the exemption. But after several courts nevertheless applied the exemption, USDOL said that it would no longer dispute the issue.

In April 2011, however, USDOL changed course and deleted the controlling regulation, stating that the change reflected its view that the exemption should be limited “to salesmen who sell vehicles and partsmen and mechanics who service vehicles,” and that Service Advisors did not fall within this description (read more andmore).

In Navarro v. Encino Motorcars, LLC, the 9th Circuit Court of Appeals (hearing cases arising out of federal courts in California, Washington, Oregon, Nevada, Arizona, and several other Western states) deferred to USDOL’s most recent interpretation of the exemption and became the first court to hold that Service Advisors are not exempt from overtime pursuant to the “salesperson” exemption (read more).

SCOTUS Will Issue The Final Word
On January 15, 2016, the U.S. Supreme Court announced that it would take the matter under consideration and will clarify the issue for dealers once and for all. The Court will hear an appeal of the Navarro case, and its decision is expected by June 2016.

The Court’s decision will apply to all dealers throughout the country. In the event the Court somehow finds that Service Advisors are not exempt from overtime under the “salesperson” exemption, you should be prepared to explore alternatives. In particular, you should revise Service Advisor pay plans to satisfy the “commission-paid” exemption, which is also available to dealers in most states.

Fisher & Phillips will issue a Legal Alert to summarize the Supreme Court’s ruling on the day the case is decided. To ensure you are on the distribution list, please sign up here.

By:  Steven Ferenczy & Matthew Simpson

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The National Labor Relations Board’s (NLRB) “quickie” election rules took effect on April 14, 2015, substantially expediting the union election process. Among other things, the new rules cut the time period between representation petition and election in half, and require employers to provide expedited disclosure of worker phone numbers, email addresses and other personal information to unions.

These new rules have been a source of contention for many employers that have been forced to prepare for significant changes in union-organizing tactics. Fisher & Phillips has conducted its own review of union petitions filed against dealerships in the last year. While an analysis of the first six months of union activity following the new rules established that unions as a whole are benefiting significantly from the changes, the same may not be true when it comes to dealership elections.

Summary Of Findings
Interestingly, only 30 petitions were filed against dealerships in 2015, which is down considerably from a five-year high of 42 petitions in 2014. Perhaps of more interest: the frequency of petitions filed against dealerships slowed after the April 14, 2015 inception date, swith more than 30% of the 2015 petitions filed in the first quarter of the year.

In addition to the number of petitions slowing after the new rules kicked in, the percentage of union victories trended down after the “quickie” election rules took effect. There were six elections that occurred under the old rules, with victories for unions in four of the six, for a 67% union-win rate. There were 12 elections that occurred under the new rules, with victories for unions in seven of the 12 elections, or a 58% union-win rate.

In total, the 30 petitions yielded only 11 union victories. Management emerged victorious in seven elections, while there were nine withdrawn petitions, one dismissal, and two blocked elections. Not surprisingly, the overwhelming majority of these petitions were filed in the three states that consistently see the most dealership union activity: California, Illinois, and New Jersey.

Although dealerships seem to have dodged much of the punch that the “quickie” election rules packed in 2015, they did not go completely unscathed. First, elections are occurring faster than ever. In fact, they occurred about eight days faster from the effective date through the end of the year (26.3 days from April 14 through December 31 vs. 34.2 days from January 1 through April 13), and occurred 14 days faster than a year ago (26.3 days vs. 40.3 days during the same period in 2014). Finally, the percentage of dealership victories continued to trend downward in 2015, with a 38.9% victory rate compared to a 42.4% victory rate in 2014.

Prepare For The Future
While the true effect of the new “quickie” election rules may not have impacted dealerships as hard as some other industries, you need to ensure that you are proactive rather than reactive in this area. You should prepare today for a potential wave of new petitions tomorrow.

It is critical that you take the time to properly train your supervisors to look for the early warning signs of potential union activity, and ensure that these same supervisors understand the labor laws governing the union election process.

By:  John E. Donovan

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Many dealerships give little thought to their sales pay plans. After all, they’re simple and straightforward, right? X% of the front gross and Y% of the back end gross, plus whatever bonuses you choose to give. About as simple as you can get.

Unfortunately, an increasing number of dealerships are finding out that their pay plans are a lot more complicated than they thought, particularly when they are examined in a courtroom by jurors who know nothing about the car business. A recent case from New York provides a good example of how complicated a sales pay plan can be.

Case In Point
In this case, a group of salespeople sued their dealership group, claiming they were paid below minimum wage and had unlawful deductions taken from their commissions. Eventually a total of 89 salespeople from all six dealerships joined the lawsuit.

The sales pay plan at issue was straightforward enough: 20% of the front gross and 10% of the back gross, less a $275 pack on new cars and a $950 pack on used cars; and $50 mini on a new car sold at a loss, $100 mini on a used car. The dealership group also paid $20 per day as shift pay. Like most salespeople, they worked 45 to 55 hours a week, a fact the dealership group admitted.

Minimum Wage: Strike One
The court ruled on the minimum wage claim quickly and easily – and in favor of the employees. The facts showed that when salespeople made no sales in a particular week, the dealerships only paid them $20 per day, far less than the required minimum wage. The court rejected the dealership group’s argument that the salespeople’s annual earnings – $40,000 to $50,000 – were more than sufficient to cover minimum wage on an annual basis.

This attempted “annual salary pitch” was dismissed as a red herring. After all, the law is clear: with a weekly pay plan, the salespeople must be paid at least the minimum wage for all hours worked each week, regardless of earnings in previous or subsequent weeks.

Deductions: Strike Two
The court then turned to the commission claim. The salespeople claimed that the dealership group had manipulated their commissions in a number of different ways by adding additional “packs” and including extra “costs” to the vehicle and the transaction. Specifically, each of the dealerships made a deduction for “auction expenses” to which the salespeople had not agreed.

They also argued that the dealerships inflated the actual cost of these charges by having some work performed by “sham subsidiaries.” They claimed, for example, that the actual costs of etching, tire and wheel protection, and extended warranties were inflated when deducted from their commissions, further reducing their compensation. Finally, they claimed that the dealer group made improper deductions from their commissions by fining them for personnel infractions (using improper forms, tardiness, other disciplinary matters), damage done to vehicles, and mechanical problems.

The court started by examining the written documents explaining the commission calculation and found that they permitted the employer to make deductions for commission packs, transportation expenses, open Repair Orders, and gasoline costs. However, the court found that there was no language authorizing the deduction for “auction expenses.” Therefore, that deduction was found to be improper and unlawful.

The dealership group defended the deduction, claiming that they had been taking it for years without complaint, meaning that the salespeople had, in effect, agreed to it. Not so, said the court: “A failure to complain does not render that conduct permissible in light of the clear contractual language to the contrary. Silent suffering of a contractual breach certainly does not excuse the dealership’s failure to live up to its contractual obligations.”

The court then addressed the “chargeback” deductions for disciplinary matters and similar infractions, and also found them improper. The court noted that none of these deductions were spelled out in the pay documents, and were not part of any established company policy.

Willful Violations: Strike Three
All these mistakes were compounded when the court determined that the dealer group’s violations were “willful,” entitling the salespeople to double the amount improperly withheld. Under federal law, proof of willfulness is fairly easy: the salespeople only had to prove that the dealership group was aware of the existence of the federal Fair Labor Standards Act.

In this case, that finding was not hard to reach. The court noted that the dealer group had undergone two state wage-hour investigations in recent years and had been cited for wage violations on both occasions, but had never changed its pay practices.

Resolution Of The Case: It Wasn’t Pretty
So how did it all turn out? The case finally settled in December 2015, six years after it was originally filed. The soft costs associated with six years of litigation were staggering: a number of company employees, including owners, were subjected to stressful and time-consuming depositions; the dealerships had to produce hundreds of thousands of documents in discovery; the plaintiffs’ attorneys spent days at the dealerships examining thousands of deal files; and management was forced to attend numerous court hearings, meetings with their attorneys, and at least two mediation sessions.

The hard costs were even worse. The dealership group settled the minimum wage claims for $423,569.92. It also agreed to settle the commission claims by creating a fund of $5,500,000. About a third of the fund will go to the plaintiffs’ attorneys, while the rest will cover unpaid commissions, settlement costs, and other costs associated with the case.

Plus, the group had been paying its own attorneys – two different attorneys, one representing the owners and the other representing the General Manager, who had also been named in the lawsuit – for the six years of litigation.

To add insult to injury, the lawsuit inspired a separate “copycat” lawsuit filed by another former salesperson making the same claims. That separate case took over two years to resolve and finally settled for $150,000.

Lessons To Be Learned
So what can we learn from this case? You should resolve to start 2016 by reviewing your pay plan to make sure you don’t fall victim to the same troubles. Here are six practical steps you can take right away:

1. Remember that a sales pay plan is a legally binding document, enforceable in court. You should take great care in drafting it to be sure that it states exactly how your salespeople will be paid.
2. More importantly, you must ensure your salespeople are paid exactly in accordance with the plan. If you want to make an additional deduction in the commission calculation, for example, or make any other modification, you must revise and reissue the pay plan.
3. You can calculate the commission any way you want, but you must clearly disclose any particular deductions that will be made from commissions.
4. If you justify any part of your pay plan simply because you’ve been paying your people that way for years without complaint, that’s no guarantee you won’t be sued tomorrow. Pay plan claims are treated as contract claims, which often have a six-year statute of limitations. Review them to make sure they are compliant even if you’ve heard no complaints.
5. Similarly, claiming that “all dealerships do it this way” is not likely to impress a judge. Arguing that a certain part of your plan is “industry practice” is unlikely to get you off the hook in court. Review your plan with an eye toward the law, not toward the dealership down the street.
6. Make sure you review your company policy to make sure it doesn’t conflict with the pay plan or the law. Unilateral policies (allowing for deductions for fines or damage to vehicle, for example) are unlikely to trump the terms of a pay plan, and could violate state or federal law.

Conclusion: Don’t Scrap Your Pay Plan
The irony of this and many other sales pay plan lawsuits is that the dealership could have lawfully paid its salespeople exactly as it wanted if it had just properly drafted its sales pay plan. For example, a dealership could lawfully deduct the cost of the dealer’s dog groomer from sales commissions so long as this is clearly spelled out in the pay plan.

Perhaps this is one reason why so many dealership pay plans are purposefully vague – some dealers do not want to be up front with their employees about what is actually being deducted when calculating their commissions. Of course, as this case made clear, if you are not up front and your pay plan is not transparent, there may be a significant price to pay.

We’ve heard reports of some dealers who are so frustrated with legal concerns that they decide they are going to do away with written sales pay plans altogether to protect themselves from liability and preserve their flexibility. Don’t do that; that’s just jumping out of the frying pan and into the fire. Your pay plan will still be just as legally binding as a written one, but now it will be an oral contract. It is far more difficult for a dealership to prove the terms of such a contract, and your chances of winning in court will be greatly reduced.

For years, Fisher & Phillips has helped dealerships across the country draft sales pay plans that comply with both federal and state laws, and also include proper commission-deduction disclosures. If you would like to have us review your current sales pay plan to determine if it will pass legal muster, we would be happy to do so.

Just contact your Fisher & Phillips attorney, or call any of our offices and ask for a member of our Dealership Practice Group. They will be happy to help.