U.S. Supreme Court and Overtime Exemptions: The Landscape Changes Again, or Does It?

April 13, 2018 • Brian K. Keeley

The cardinal rule of overtime is this: All employees are paid hourly, and are paid overtime rates for more than 40 hours of work in a week, unless an exemption applies. Most employers are familiar with the most common exemptions: administrative employees, executive employees, professional employees, outside sales employees, and some computer employees. But it’s important to remember that there are roughly a couple dozen exemptions to either minimum wage or overtime under federal law, and a similar, but not identical, set of exemptions under Washington state law. But the cardinal rule remains: unless an employee falls under one of the exemptions, they are paid hourly, and paid overtime rates for more than 40 hours of work in a week, unless an exemption applies.

For at least the past 60 years, federal courts, including the U.S. Supreme Court, have explained that exemptions to the overtime rules should be “narrowly construed,” meaning that unless a job falls squarely and almost unquestionably within an overtime exemption, the exemption does not apply. That notion of narrow construction has guided the U.S. Supreme Court since at least 1945, when the Court explained that any exemption from the federal minimum-wage and overtime laws “must therefore be narrowly construed.” Phillips, Inc. v. Walling, 324 U.S. 490, 493 (1945). The Court has repeated this phrase in cases since, and virtually all federal courts to evaluate overtime exemptions have been guided by this notion. Likewise, the Washington Supreme Court and other state courts have applied this notion to their own state minimum-wage and overtime laws, requiring that all exceptions to the basic minimum wage and overtime requirements be narrowly construed. A common way of thinking about this has been that if there was a question as to whether an exemption applied, the tie goes to the employee.

In its April 2, 2018 opinion in Encino Motorcars LLC v. Navarro, the U.S. Supreme Court evaluated whether a particular exemption applied to a particular class of employees. The specifics of the case are narrow: are “service advisors” at car dealerships (the people who greet you when you take your car in for service and talk to you about the type of service it needs) exempt from overtime under a specific exemption under federal law for “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles?” After explaining its analysis (which was either grounded in a common-sense textual reading of a statute or an exercise in complex linguistic and legal gymnastics, depending on your political persuasion), the Court concluded that, yes, service advisors are “salesmen … primarily engaged in … servicing automobiles.” Therefore, they are exempt from federal overtime requirements.

In reaching its conclusion, however, the Court did away with 60 or more years’ worth of the “narrow construction” notion, at least for federal overtime laws, and without much discussion. Without mentioning the times over the past 6 decades that the Court has stated and relied on that notion, the Court this time simply said that overtime exemptions written into the federal overtime statute should not be “construed narrowly,” but instead should just be given a “fair” interpretation or reading. In other words, it’s now unclear who the tie goes to, and it may very well now go to the employer.

This may throw long-understood notions of overtime exemptions under federal law into chaos, though how it plays out will depend on the future interpretations of federal appellate and district courts. It may result in employers classifying more employees as exempt, as they might no longer feel required to precisely fit a particular job into an exemption for the exemption to apply. Employers might be given more leeway with such classifications. And courts will be left to sort those out, now relying on a “fair interpretation” standard instead of a “narrow construction” one when deciding whether a particular type of employer falls under a specific exemption under federal law.

What Does This Mean for Washington Employers?

For Washington employers, this may very well change … nothing. First, for car dealers in Washington, even though service advisors now no longer need to be paid overtime under federal law, there is no identical counterpart under state law to the exemption that was at issue. While federal law offered an exemption to “salesmen … primarily engaged in … servicing automobiles,” under Washington state law, the closest exemption applies only to sales of vehicles, not to servicing them. So, unless they find another exemption that might apply, Washington car dealers still must pay service advisors overtime for hours worked over 40 in a week.

But more broadly than that, the Washington Supreme Court has often invoked the notion that exemptions to the state’s minimum-wage and overtime laws must be “narrowly construed.” It last did so in 2007, in Bostain v. Food Express, Inc., 159 Wn.2d 700. Until the Washington Supreme Court stops narrowly construing exemptions to state overtime laws, those exemptions will continue to be “narrowly construed,” meaning state overtime laws and exemptions will still be liberally construed in favor of employees. And because employers must comply with both federal and state law when it comes to wage and overtime issues, in this case, employers will need to continue to comply with state law, despite the change in federal law.

So despite all the bluster and rhetoric about sea changes in federal overtime exemptions that will follow Encino Motorcars, (and it’s out there), employers in Washington are not likely to experience any effect from the Supreme Court’s opinion. Nonetheless, this is a good time for employers to review their classifications (as all employers should do periodically) to determine whether employees’ job duties or compensation methods still match their classification, or whether they have changed enough to warrant reclassifying them from nonexempt to exempt, or from exempt to nonexempt.

If you have questions about exempt classifications and how they affect your business, please contact Brian Keeley.

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Brian K. Keeley

Meet Brian

Mr. Keeley represents businesses in employment and litigation matters. He helps businesses avoid employment issues by providing preventive maintenance for conducting business, including having appropriate employment policies, training employees and supervisors, and proactively identifying and addressing potential employment problems. When things go wrong, he represents employers before federal, state, and local employment agencies, in federal and...