Know your FLSA Overtime Exemptions

By: W. Kirby Bissell

As you are undoubtedly aware, automotive dealers have many employees that qualify for exemptions from overtime compensation otherwise required by federal law, specifically the Fair Labor Standards Act or FLSA. The FLSA requires that most employees be paid 1 and ½ times their normal, effective rate of pay for all hours worked in a given week beyond forty (40). However, dealers should be aware that the FLSA’s exemptions are narrowly interpreted and by no means cover all employees at a dealership. Understanding the applicability of these exemptions is crucial to avoiding not only potential lawsuits, but also enforcement actions by the Department of Labor. A related nuance requires ensuring that an employee’s effective rate of pay includes all required remuneration, which generally means a salary or hourly rate as well as non-discretionary bonuses. Non-discretionary bonuses are those included in an employee’s pay plan.

With new leadership in the White House, the Department of Labor is taking a much more active role in policing employer violations of the FLSA. Under the former administration, the Department of Labor was mostly hands-off and only investigated matters brought directly to its attention through credible complaints. Now, though, expect the Department of Labor to investigate those matters as well as target specific enforcement at certain industries too.  Automotive dealerships are always of interest because of their exemptions. Moreover, under the former administration, the Department of Labor’s guidance required that liquidated damages (a doubling of any owed back wages for failure to pay minimum wage or overtime) were only to be applied in the most egregious cases. The new administration has issued a directive that the Department of Labor is required to assess liquidated damages in every case where a violation is found. For these reasons, it is a prudent time to assess your employee pay practices and ensure your dealership is in compliance.

Three major exemptions from paying employees required overtime compensation exist for automotive dealerships.  These exemptions cover 1) salesmen; 2) partsmen; and 3) mechanics. Simple enough, right? Wrong. A key requirement is that each individual to whom an exemption is potentially applicable be “primarily engaged in job duties” that qualify them for one of the noted exemptions. This practically means that over 50% of that individual’s time must be spent performing job duties consistent with one of the exemptions noted above.

The salesman exemption is pretty straightforward. It clearly applies to salespeople, sales managers, and F&I sales persons or managers. Business development center employees or online salespeople are a closer call. But, generally, as long as their pay is tied to incentivizing greater sales (i.e., generating appointments from leads, percentage of gross profits on leads they handle that result in sales, etc.), the exemption should also apply to those individuals. 

Similarly, the partsman exemption is also fairly simple. If an individual is primarily engaged in requisitioning, stocking and/or dispensing parts, they too are exempt from overtime requirements.

Most confusion arises regarding whether employees qualify for the mechanic’s exemption. The mechanic’s exemption is narrowly-defined to mean a service technician, performing complicated and labor-intensive repairs. However, certain individuals that dealerships may consider “mechanics” generally do not qualify for an overtime exemption. Federal regulations note that the term mechanic “does not include employees primarily performing such nonmechanical work as washing, cleaning, painting, polishing, tire changing, installing seat covers, dispatching, lubricating, or other nonmechanical work.” Federal courts have interpreted this limitation as requiring overtime to be paid to quick-lube mechanics as well as detailers. This additional overtime pay is required no matter the pay structure of those individuals. So, even if a quick-lube mechanic or detailer is paid using a “flag rate” or “piece rate” (i.e., a set amount per job performed), they are still entitled 1 and ½ times their effective rate of pay for any hours worked over forty (40) in a given week. Relatedly, service advisors are considered exempt as long as their pay is tied in part to the value of the “services” they sell to customers.

Other dealership employees are mostly non-exempt and must be paid 1 and ½ times their effective rate of pay for all hours over forty (40) in a given week. Those individuals who supervise other non-exempt employees or perform “professional” job duties (i.e., accountants or controllers) qualify for different exemptions as long as their salary exceeds $35,568 annually. However, receptionists, warranty-related clerical employees, porters, janitors, cashiers, and others not included in the above-listed exemptions are all entitled to overtime pay.

Considering the focus of the new administration in the White House is already proving to be employee-centric, now is as good a time as ever to discuss your various pay plans with an experienced attorney to ensure you are in compliance with federal law. Failure to do so can result in significant after the fact penalties and headaches from the Department of Labor or damages from civil lawsuits.