April 5, 2018

Exempt or Non-Exempt: Now to Be Construed "Fairly," Not "Narrowly"

3 min

These are complicated times—even more complicated than usual—for the Fair Labor Standards Act (FLSA) and the question of who is exempt from its requirement of overtime pay. Two years ago, the U.S. Department of Labor (DOL) made several significant changes to the regulations delineating the so-called white collar exemptions, only to have a federal judge stay those regulations just days before they would have taken effect. DOL is currently revisiting the regulations entirely. Amid all of this, the Supreme Court has made a pronouncement that could change the tide of FLSA enforcement, not with the result of a case but rather based on one element of the Court's reasoning.

In a 5-4 decision on April 2, the Supreme Court ruled that the "service advisors" at Encino Motorcars, a Mercedes-Benz dealership in the San Fernando Valley, California, fall within the exemption for "any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, trucks, or farm implements." 29 U.S.C. § 213(b)(10)(A). 584 U.S. ___ (2018). Ultimately the Court determined that the service advisors are exempt because they are a type of salesman engaged in selling automotive repair services.

This result likely means little or nothing to any company other than a car dealership. But Justice Thomas, writing for the majority, explained the Court's reasoning in a way that may have profound ramifications for how courts—and employers in all industries—determine the applicability of all exemptions under the FLSA. Specifically, Justice Thomas rejected the notion that exemptions under the FLSA should be "narrowly construed" in favor of a less stringent "fair reading" standard. This is significant. For many years, courts nationwide, and the lower court in Encino Motorcars, have "narrowly construed" FLSA exemptions based upon an earlier Supreme Court case that said that FLSA exemptions are to be "narrowly construed against the employer asserting them," and their application limited to circumstances "plainly and unmistakably within their terms and spirit." Arnold v. Ben Kanowsky, Inc., 361 U.S. 388, 392 (1960). Now, rather than tilting against application of an exemption (and thus in favor of requiring the payment of overtime), Justice Thomas reasoned that courts should give each exemption a "fair reading" to determine whether the plain language of the exemption would or would not justify its application to a particular employee. In dissent, Justice Ginsberg noted that the majority's opinion "unsettles more than half a century of our precedent."

"Narrowly construing" these exemptions placed a heavy burden on employers to justify classifying an employee as exempt. Justice Thomas's "fair reading" standard presumably will make it easier for employers to justify classifying employees as exempt, and thus avoid paying overtime. Employers thinking about classifying or re-classifying employees as exempt should consult with employment counsel, in part to assess whether this new standard may be helpful.