Fair Labor Standards Act (“FLSA”) - AutoDealerCFO

1 fair Labor Standards Act ( flsa ) Under the flsa employees generally are entitled to receive an hourly rate or a hourly rate equivalent that is equal to or greater than the federal minimum wage rate and also receive an overtime premium pay of time and one half the regular rate of pay for hours worked in excess of forty (40) hours per week. The FSLA also contains a number of exemptions for the minimum pay and/or overtime requirements. The United States Department of Labor enforces the FSLA and the Department s wage and Hour Division is the administrative unit that actually performs this task. Individual states pass Labor laws that may differ from the federal flsa and govern employers operating within the state. Generally the law that is more generous to the employee will determine what is permissible in each state. Additionally, federal courts from different jurisdictions have come to completely opposite conclusions in cases that involve nearly identical issues. As a result wage and hour requirements can be very confusing and hard to follow.

2 Applicability to Dealerships Generally, automobile dealerships are subject to the flsa and state Labor laws in the states in which they operate. Specific exemptions for automobile dealerships have been codified in the flsa and many states have followed suit. The following discussion involves the flsa . You should review any state requirements that may require a different guideline. Dealership Specific Issues A specific exemption exists for certain employees of nonmanufacturing establishments engaged in the business of selling automobiles, trucks, trailers, farm implements, or aircraft. In order for an establishment to qualify for this exemption it must meet two requirements as follows: 1.) The establishment must not be engaged in manufacturing; and 2.) The establishment must be primarily engaged in the business of selling automobiles, trucks, trailers, farm implements, or aircraft to the ultimate purchaser. In order to be primarily engaged in the business of selling automobiles (in the case of an automobile dealership) more than fifty percent of the annual volume of sales or business done must come from the sale of automobiles to the ultimate purchaser.

3 Establishment-establishment refers to a distinct physical place of business rather than to an entire business or enterprise which may include several places of business or establishments. The regulations also state that in the case of an automobile dealership the establishment includes all activities or departments that functionally operate as a part of the dealership or establishment. As an example a recent Department of Labor Opinion Letter described an auto dealership business as three separate establishments. Two separate establishments that sell vehicles predominately to the general public ( Retail ) and another separate establishment that predominately sells vehicles to rental companies and large fleet operators ( Non Retail ). If an establishment satisfies the two requirements, an exemption from the overtime provisions is available for salesmen, partsmen, and mechanics employed by the establishment. Current regulations exclude from this exemption service managers, service writers or advisors, and service salesmen.

4 However, recently the Department of Labor proposed new regulations to remove the language that excludes these positions from the exemption and specifically includes them in the definition of salesmen and therefore make them exempt from overtime provisions. This proposed change is meant to bring the regulations in line with court decisions that have included these additional positions within the exemption. In order for employees to be classified as salesmen, partsmen, or mechanics over fifty percent of their time during a work week must be spent in selling or servicing automobiles. Salesmen- salesmen are defined as employees that over fifty percent of their time is spent making sales or obtaining orders or contracts for the sale of automobiles. Incidental work including deliveries and collections is included within the definition. Partsmen- partsmen are defined as employees that over fifty percent of their time is spent requisitioning, stocking, and dispensing automobile parts.

5 Mechanics-mechanics are defined as employees that over fifty percent of their time is spent performing mechanical repairs or work to automobiles. Non-mechanical repairs or work such as washing, cleaning, painting, polishing, tire changing, installing seat covers, lubricating or dispatching are not included in this exemption. Other exemptions Commission Employees of Retail or Service Establishments An additional exemption from overtime provisions is allowed for certain commission employees of a retail or service establishment. To qualify for this exemption, three requirements must be met as follows: 1.) The employee must be employed by a retail or service establishment; 2.) The employee s regular rate of pay must exceed one and one half times the applicable minimum wage ; and 3.) More than half of the employee s total earnings in a representative period must consist of commissions on goods or services. A retail or service establishment is an establishment 75 percent of whose annual dollar volume of sales of goods or services (or of both) is not for resale and is recognized as retail sales or services in the particular industry.

6 An automobile dealership will generally qualify as retail or service establishment. Commissions on goods and services needs to be further broken down to determine if requirement #3 is satisfied. Services are fairly self explanatory. Goods are widely defined including not only physical goods but articles and subjects to a transaction such as ideas, insurance policies, negotiable instruments and commercial paper. The definition of commissions is subject to and has been the subject of debate. Commission payments in a retail or service establishment generally are keyed to a rate of sales. However the exemption is based on commissions on goods and services which would include all types of commissions customarily paid based on goods and services the establishment sells and not exclusively on the sales of goods and services. Commission plans that include a periodic payment (usually weekly) of salary, guarantee or draw and include a settlement period where total commissions in excess of the periodic payment (if any) are paid can also be subject to debate.

7 Generally these plans are considered bona fide and the amount representing commissions is the total commission computed for the period whether or not it is greater than the periodic payment. For commission plans that include a salary or periodic payment plus actual commissions, the periodic payment will never be considered commissions. Within an automobile dealership, employees that might be covered under this exemption would include finance and insurance salespersons, body shop painters, and vehicle detailers. This exemption might also be used if a dealership has a separate business unit or establishment that does not meet the requirements of engaged primarily in the selling of automobiles to the ultimate purchaser. White Collar Exemptions The FSLA provides an exemption from both the minimum wage and overtime pay for certain employees that are paid more than a specific minimum salary and are employed in certain white collar occupations including executives, administrative, professionals, computer professionals and outside salespersons.

8 For an employee to qualify for the white collar exemptions the following three requirements must be met: 1.) The employee must be paid a pre-determined and fixed salary that is not subject to reduction because of variations in the quantity and quality of the work performed (The Salary Basis Test). 2.) The amount of salary paid must be a least $ per week (The Salary Level Test). 3.) The employee s job duties must primarily involve executive, administrative, professional, computer or outside sales duties (The Duties Test). In order to meet the Salary Basis Test, the employee must receive, subject to a few identified exceptions, a full weekly salary for any week in which the employee performs any work without regard for the number of days or hours worked. The regulations permit employers to deduct from the employee s salary one or more full days without jeopardizing the employees exempt status for the following reasons: 1.) Absences for personal reasons other than sickness and disability.

9 2.) Absences for sickness and disability (including work related accidents) if the deduction is made pursuant to a bona fide plan or policy of providing compensation for salary lost due to illness. 3.) To offset amounts employees receive for jury duty, witness fees, of for military duty. 4.) For penalties imposed in good faith for infractions of safety rules of a major significance. 5.) For disciplinary suspensions imposed in good faith for workplace conduct rules that are imposed pursuant to a written policy applicable to all employees. 6.) A proportionate part of the employee s full weekly salary can be paid for the initial and terminal week of employment. 7.) For unpaid leave taken pursuant to the Family Medical Leave Act. Loss of exemptions due to improper deductions will be based on the facts an circumstances relating to the improper deductions. An employer can safe harbor its exemptions by adopting a policy that prohibits improper deductions, provides a complaint mechanism, reimburses employees for any improper deductions, and generally exhibits a good faith effort to comply with the requirements.

10 In order to meet the Salary Level Test, an employee must receive a salary of at least $ per week. Costs incurred by the employer in providing the employee with board, lodging, and other facilities due not count toward the minimum salary. For computer employees the salary requirement may be met by an hourly payment of at least $ The Duties Test is satisfied by looking at the primary duties of each employee as opposed to job titles. Each case is based on the individual facts and circumstances of each case. Primary duty means the principal, main, major or most important duty that the employee performs. Executive- primary duties must include managing, including a significant influence in hiring and firing, the enterprise or a customarily recognized department or subdivision of the enterprise and customarily and regularly supervising the activities of at least two employees or the equivalent of two employees. An employee who owns a least twenty percent equity interest in the enterprise in which employed and who is actively engage in its management qualifies for this exemption.