On Oct. 16, ASA’s Webinar Wednesday focused on “Countering the Dealership Overtime Exemption,” which was presented by ASA’s Wage and Hour Attorney Brian Farrington of Cowles & Thompson in Dallas.
He covered the basic elements of the FLSA Section 7(i) overtime exemption, which practices can lead to ineligibility for the exemption, and how to recognize when applicable state law can prevent shops from using the exemption. Tony Molla, vice president of industry relations for ASA, introduced Farrington, reminding association members that they have the ability to contact Farrington for advice.
Farrington began his webinar by explaining that the Fair Labor Standards Act of 1938 (FLSA) is the basic wage and hour law in the U.S. and establishes standards in four areas: minimum wage, overtime, child labor, and recordkeeping. Noting that these standards were “determined by legislation that’s well over 80 years old,” Farrington warned that FLSA does not preempt state laws. “The FLSA allows states to impose standards which are more protective of employees than the federal standards. For instance, many states and even cities have higher minimum wages than the federal standard of $7.25.”
This means that some states have much stricter overtime standards than the FLSA, compared to other states which have no overtime law and defers to FLSA solely. Employers in states with overtime laws must determine whether their state’s laws mirror the federal exemptions. The example provided was California which has a similar exemption to FLSA 7(i), but it doesn’t apply to repair shop techs, so shops in California must pay overtime to their technicians. According to Farrington, “Bottom line – employers must know the state OT laws in every state in which they operate, plus they must have a working familiarity with federal law, or talk to an attorney who does.”
Stressing the need to be very precise about the definition of overtime, Farrington explained, “Overtime is often viewed as a reward for an employee who works a long week. Actually, it is a penalty on the employer for working an employee over 40 hours.”
“The primary purpose of overtime is to spread employment.
Overtime is time and one-half of an employee’s regular rate of pay for hours worked over 40 in a workweek. The intent is to make you go hire more people instead of working people over 40 hours,” Farrington continued. “Given its actual purpose, it’s easier to understand the reason for limited exemptions and why exemptions from overtime are very specific and limited only to those who clearly meet the terms of the exemption.”
Pointing out that collision repair shops and mechanical shops also compete with auto dealerships, Farrington noted that they start with a significant disadvantage since overtime is not required for dealership salesmen, partsmen and mechanics, according to FLSA 13(b)(10)(a), with dealership being defined as “an establishment which derives over 50% of its gross revenue from the sales of automobiles, trucks or farm implements.”
Still, shops have an opportunity to offset this disadvantage with another exemption, FLSA Section 7(i) which exempts employees from overtime if they meet three tests: 1) they work for a retail establishment (defined as a distinct physical location that has 75% of its income derived from retail sales); 2) their regular rate is more than 1.5 times the federal minimum wage; and 3) they are paid primarily by commission.
In regards to the first test, it’s important to note that the analysis must be completed separately for each distinct physical location. Retail sales are “sales made to the general public … In a collision shop, this means the repair of vehicles for individual customers, even when an insurance company pays for some or all of the repair on behalf of the retail customer,” Farrington said.
Non-retail income generally falls into one of three categories in a typical shop: income from work on heavy trucks or specialized equipment, income from fleet work where work is done for a fleet customer pursuant to a contract or agreement and where the customer receives a fleet discount, or income from sales for re-sale, such as a dealer engages a shop to refurbish a used car that the dealership sells, or a dealership farms out its body work to a collision repair shop.
“In each case, the income to the shop is non-retail,” Farrington stated. “These count against your retail income and will disqualify you if it exceeds 25% of your establishment’s income. If 25% or less of your establishment’s income is from a non-income source, your facility qualifies for the first test of the exemption from paying overtime to techs.”
A couple important things that Farrington emphasized were “Transmission rebuilders are not considered retails, but manufacturers, and so cannot use 7(i). Income from private party tows, even if reimbursed by insurance, is retail. Income from police tows, such as where an employer has a contract with a city to tow cars to an impound lot, is not retail. Although there is no official position, in its enforcement, USDOL/WH has taken the position that when a business pays a towing company to tow illegally parked cars from business parking lots, such income is not retail.”
The second test requires the employee’s regular rate to be more than 1.5 times the minimum wage, which is $10.88 based on the federal wage, but in states with higher minimum wages, the employee’s regular rate must be 1.5 times the higher state minimum wage. Base rate and commissions, if applicable, are included, and the employee’s total compensation for the workweek must be divided by the number of hours worked in order to determine if this number is met.
The third test is that the employee must receive over half of total earnings in commissions, measured over a “representative period” which must be at least a month but no more than a year. “If the commission earnings are greater than the other income, the employee is exempt for the following representative period, when the analysis is done again, and so on,” Farrington explained.
Farrington explored examples of draws against commission and explained, “The rate should always be 1.5 times the rate for the longest week they might work. Employers should ensure that their regular payments to the employees are not considered ‘salary’ payments. The best way to do this is to carry forward any amounts by which draws exceed commissions, and charge them against future extra commissions.”
“Flat hours or book hours are interpreted as commission so this becomes entirely relevant to you,” Farrington added. “A commission is a situation where what the employee receives in earnings is a function of what the customer pays. One of the most common forms of payment to mechanics is payment of ‘flat-rate hours.’ Under this system, a fixed number of hours is attributed to a particular job, regardless of how long it actually takes to do the job. The customer pays this number of hours to the shop at the shop’s labor rate, and the technician who does the job gets paid this number of hours times his/her flat rate or book rate or shop rate.”
Investigators use the Field Operations Handbook (FOH) to determine how to enforce the law, and FOH 21h04(d) specifically addresses flat rate hours: “Some auto service garages and car dealers compensate mechanics and painters on the following basis: The painter or mechanic gets so much a ‘flat rate’ hour for the work he or she performs. A ‘flat rate’ hour is not an actual clock hour. The employee is given a certain proportion of that charge expressed in terms of so many dollars and cents per ‘flat rate’ hour rather than in terms of a percentage of the charge to the customer.”
“The dealer does not change the employee’s share per flat rate hour if the charge to the customer is changed,” FOH 21h04(d) continues. “In such situations, Wage-Hour will not deny that such payments represent ‘commissions on goods or services’ for purposes of Sec. 7(i). Such employment will qualify for exemption under Sec. 7(i) provided all the other tests of the exemption are met.”
Farrington stated, “This is critical! This interpretation by USDOL/WH, that flat rate hours are commissions for purposes of 7(i), has been accepted by both the 11th and 7th Circuits – see Klinedinst v. Swift Investments, Inc., 260 F.3d 1251 (11th Cir. 2001) and Yi v. Sterling Collision Centers, Inc., 480 F.3d 505 (7th Cir. 2007). If you are consulting with an attorney about possibly bringing a 7(i) case, be sure to bring these cases to the attorney’s attention.”
If all three tests are passed, 7(i) can help offset the dealers’ advantage and blanket exemption, but employers should see competent legal advice before implementing a 7(i) compensation plan due to the complexity of the exemption. Farrington also reminded attendees, “Employers in states that have state overtime laws should consult local counsel to be sure that their state overtime law has an exemption analogous to 7(i).”
Farrington concluded his webinar with a question-and-answer session. ASA’s next Webinar Wednesday will be held on Nov. 20 with “The New Smartphone Consumer,” presented by Jason Soto of MobileSoft Technology. To register for ASA’s webinars, visit asashop.org/webinars.