Encino Motorcars v. Navarro

PETITIONER: Encino Motorcars, LLC
RESPONDENT: Hector Navarro, et al.
LOCATION: Mercedes Benz of Encino

DOCKET NO.: 15-415
DECIDED BY: Roberts Court (2016- )
LOWER COURT: United States Court of Appeals for the Ninth Circuit

CITATION: 579 US (2016)
GRANTED: Jan 15, 2016
ARGUED: Apr 20, 2016
DECIDED: Jun 20, 2016

Anthony A. Yang - Assistant to the Solicitor General, for the United States as amicus curiae, for the respondents
Paul D. Clement - for the petitioner
Stephanos Bibas - for the respondents

Facts of the case

Encino Motorcars, LLC (Encino) sold and serviced Mercedes-Benz automobiles. Hector Navarro was employed there as a service advisor, which involved him greeting customers and assessing their needs as they entered the business. Navarro, along with other similarly-situated plaintiffs, sued Encino for failing to pay overtime compensation when they worked more than forty hours a week. Under the Fair Labor Standards Act, “service advisors” engaged in servicing automobiles are not entitled to overtime compensation, so the district court dismissed their overtime claim. The U.S. Court of Appeals for the Ninth Circuit reversed the lower court’s decision and held that Navarro and other employees were not exempted from overtime compensation. In reaching its decision, the appellate court relied on the Department of Labor’s 2011 determination that service advisors were not exempt under the FLSA, which was a reversal of the position that the Department had taken in 1987.


Are “service advisors” employed at a car dealership exempt from overtime compensation under the Fair Labor Standards Act?

Media for Encino Motorcars v. Navarro

Audio Transcription for Oral Argument - April 20, 2016 in Encino Motorcars v. Navarro

Audio Transcription for Opinion Announcement - June 20, 2016 in Encino Motorcars v. Navarro

John G. Roberts, Jr.:

Justice Kennedy has our opinion this morning in case 15-415, Encino Motorcars versus Navarro.

Anthony M. Kennedy:

The Fair Labor Standards Act is referred to as the FLSA.

Now that Act protects certain employees.

It requires employers to pay overtime compensation to those employees if they work more than 40 hours in a given week.

The Act also has certain exemptions from this requirement, and the question presented in this case is whether one of these exemptions cover certain employees in an automobile dealership.

The employees at issue are known as service advisors.

They sell automobile repair and maintenance services.

The issue is whether they are covered by a statutory exemption, and that exemption refers to any salesman, partsman or mechanic primarily engaged in selling or servicing automobiles.

In 1970, the Department of Labor issued an interpretive regulation that defined the statutory term salesman.

It read that term to cover employees who sell vehicles but not to the employees who are service advisors.

In 1978, however, the Department issued an opinion letter departing from its previous position.

It stated that service advisors could be exempt under the statute.

The department confirmed its new position in 1987.

In 2011, the department changed course yet again.

It issued a new regulation that returned to the definition of salesman that meant that an employee who sells vehicles but not an employee who sells services are covered.

The department gave little explanation for its decision to abandon its decades-old practice of treating service advisors as exempt.

Petitioner is an automobile dealership.

Respondents are or were employed by petitioner as service advisors.

These service advisors brought suit alleging that the dealership violated the FLSA by failing to pay them overtime compensation.

The District Court granted the dealership's the Motion to Dismiss, but the Court of Appeals reversed in relevant part.

The Court of Appeals construed the statute by deferring to the interpretation set forth by the department in its new 2011 regulation.

Based on that deference to the agency, the Court of Appeals held that service advisors are not exempt.

Now when an agency promulgates a regulation interpreting a statute that it enforces, the interpretation does receive deference from the courts in certain circumstances and this includes cases where the statute is ambiguous and the agency's interpretation is reasonable. But this deference is not warranted where the regulation is procedurally defective, that is where the agency fails to follow the correct procedures in issuing the regulation.

One basic procedural requirement of administrative rule-making is that an agency must give adequate reasons for its decisions.

Agencies are free to change their existing policies, but in explaining the change the agency must recognize that long-standing policies may have engendered serious reliance interest that may be taken into account, and applying those principles here, 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 interest involved, the industry had relied since 1978 on the department's position that service advisors are exempt.

Now the industry had negotiated and structured compensation plans based on this understanding.

Given this background the department needed a more reasoned explanation for its decision to depart from its existing enforcement policy.

Here the department did not analyze or explained why the statute should be interpreted not to exempt dealership employees who sell services.

This lack of reasoned explication results in a rule that cannot receive controlling deference.

The Court of Appeals should interpret the statute in the first instance without deferring to the 2011 regulation.