One Year Later: Impact of Encino Motorcars on FLSA Litigation

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Just over a year ago, in a case involving an obscure car dealership exemption from the Fair Labor Standards Act’s overtime requirement, the Supreme Court established a new standard for interpretation of FLSA exemptions. Citing Justice Scalia’s final book, Reading the Law, the Court rejected the made-up cannon that courts must narrowly construe FLSA exemptions; rather, the Court held, FLSA exemptions must be given a fair interpretation. One year later, how has this change from “narrow” to “fair” interpretations impacted FLSA litigation and DOL investigations?  

Featuring: 

Tammy D. McCutchen, Principal, Littler Mendelson P.C. 

 

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Event Transcript

Operator:  Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Labor & Employment Law Practice Group, was recorded on Wednesday, June 26th, 2019, during a live teleforum conference call held exclusively for Federalist Society members.

 

Micah Wallen:  Welcome to The Federalist Society’s teleforum conference call. This afternoon’s topic is “One Year Later: Impact of Encino Motorcars on FLSA Litigation.” My name is Micah Wallen, and I’m the Assistant Director of Practice Groups at The Federalist Society.

 

As always, please note that all expressions of opinion are those of the expert on today’s call.

 

Today, we are fortunate to have with us Tammy McCutchen, who is the principal at Littler Mendelson. After our speaker gives their opening remarks, we will then go to audience Q&A. Thank you for sharing with us today. Tammy, the floor is yours.

 

Tammy McCutchen:  Thank you, and I’m very happy to be back talking to everybody again about the Encino Motorcars v. Navarro case. This is actually Encino II—its second trip to the Supreme Court, which was decided last April 2018. And we just wanted to come back and talk a little bit about whether the Encino decision has actually had an impact on FLSA litigation.

 

So, Encino, just to give you the background, is about a rather obscure exemption from the overtime requirements under the Fair Labor Standards Act covering—and I’m gonna need to quote the statute here—“any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, trucks, or farm implements.” So for those of you interested in studying the exact language of this exemption, it can be found at 29 U.S.C. § 213(b)(10).

 

So the Encino case explores whether this exemption applies to service advisors at car dealerships who interact with customers and sell them services for their vehicles. Now, despite being a very obscure overtime exemption that applies only to car dealerships, in Encino II, the Supreme Court really changed the way that lower courts and itself are supposed to be interpreting the FLSA.

 

But let me back up a little bit to Encino I as it had some new interest, to me, today in light of the Supreme Court’s rather jumbled ruling in Kisor v. Wilkie affirming the application but, maybe, maybe changing it a little bit on Auer deference. So, apparently, the Court did not overrule Auer deference to an agency’s interpretation of its own regulations today, but it might not be as strong as it used to be. It’s very confusing, but I understand, at 3:30, The Federalist Society is going to be doing another teleforum to explain all to us what the heck the Supreme Court did today in that Kisor v. Wilkie decision.

 

During our discussion today, I hope anyone who has time to study that decision, if you’ve had time to study it, I’d be happy to have it explained to me. Although, I think I’m gonna have to sit in on that 3:30 teleforum.  

 

So Encino I was actually a challenge to regulations that were issued by the Department of Labor in 2011 revising 33 years of agency interpretation that service advisors were exempt from the FLSA. What happened was, in 1970, soon after Congress enacted this exemption, DOL issued a regulation stating that service advisors were not exempt, but that interpretation was then rejected by the Fifth Circuit in 1973, the Sixth Circuit in 1976. And after these decisions, DOL issued an opinion letter in 1978 saying that service advisors were exempt.

 

So from 1978 to 2011, in that time period, Congress enacted nearly a dozen amendments to this Section 213 but made no changes to those exemptions. DOL continued to follow this 1978 opinion letter stating that these service advisors were exempt. They put it in their Field Operations Handbook in 1987, and then, ta-da, surprising everybody in 2011, DOL issued regulations that said that they were not exempt.

 

So Encino I actually was a deference case. It came out in 2016, and, in that case, all nine justices declined to give Chevron deference to the 2011 regulation. The court reversing the Ninth Circuit and validated the regulations as procedurally defective because it had undermined significant reliance interests in the automobile industry that these folks were that exempt. And that’s an important principle too. So Encino I, to me, is actually, maybe, just as important as Encino II in that the Supreme Court told the agencies that they do have to consider reliance interests of the regulated community when they do a complete 180 on a particular point.

 

And, by the way, that reliance interests, just this week, helped me to get a win before the DOL’s administrative review board regarding a complete change in direction during the Obama administration on a Davis-Bacon Act issue. So I have not had time to study the impact of Encino I, but I think it’s a great opportunity for an article or a Federalist Society blog.

 

What is the impact of Encino I? How many courts since have denied Chevron or Auer deference because of reliance interests? That is if Auer, whatever, is left of Auer deference. So, anyway, in Encino I, the Court stopped short of reaching the merits on whether these service advisors at car dealerships were exempt, remanding to the Ninth Circuit to do that with Justices Thomas and Alito dissenting to the remand as they just wanted to go ahead and decide the issue on the merits.

 

Of course, the Ninth Circuit found again that service advisors were not exempt. And the case went back to SCOTUS, which again reversed the Ninth Circuit in Encino II, which we’re talking about today, finding that the service advisors exempt in a 5-4 decision. Now, Justice Thomas, wrote the majority decision. He was joined by Roberts, Kennedy, Alito, and Gorsuch. Just let me quote the statutory language once more: “Any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles,” and then there’s one more “or” in their summary. Anyway, what the majority found is that the use of the three “or’s” in the statute actually meant, well, “or” in the disjunctive. I think this is a good example of the increased focus by the current court on the actual language of the statutory texts. But, most importantly, for our purposes today, the court finally and firmly set aside this oft-invoked principle of interpretation that exemptions from the FLSA must be construed narrowly.

 

Now, this statement— “the exemptions must be construed narrowly”—before Encino, was in every plaintiff’s brief, was in every court decision on FLSA exemption. Narrow construction, supposedly, is now dead. In writing the decision, the majority quoted Justice Scalia’s final book Reading the Law to say—and I’m just gonna quote the key paragraph here—“Because the FSLA gives no textual indication that its exemptions should be construed narrowly, there is no reason to give them anything other than a fair, rather than a narrow, interpretation. The narrow construction principle relies on the flawed premise that the FLSA pursues its remedial purpose at all costs. We, thus, have no license to give the exemption anything but a fair reading.” Well, there you have it. Justice Scalia wins again.

 

      I cannot overemphasize the importance of this short paragraph. Every plaintiff’s brief, every court decision use that on this classification, use that narrow construction principle. Now, that is gone. It’s been gone now for over a year—April 2018. And the question really before us today is whether that change from the narrow to the fair interpretation of the FLSA exemption has had an impact in subsequent litigation.

 

      So, my magic ball—turning, turning—it says, well, outlook, not so good. Sorry about that. I’ve narrowed over 50 cases citing Encino II over the course – that were decided over the course of the last year or so. The early cases involved motions that were filed by employers in courts that had already ruled on an exemption, and they were filing motions for judgement, notwithstanding the verdict, and reconsideration of summary judgement—grants of summary judgement. None of those motions were successful. Zero wins for the employers. With all of the courts concluding that they would have reached the same decision if they had applied a fair rather than a narrow interpretation of the exemptions. So not good, but I only found about a half a dozen of those types of cases.

 

      Then, we started seeing court decisions deciding on exemptions in the first instances that were issued after Encino. Here, the courts discussed the Supreme Court’s rejection of the narrow construction principle. They cited Encino’s fair interpretation principle. They put all the right words about how you’re supposed to interpret the FLSA exemptions and their decisions. But, nonetheless, employers got wins in only 31% of the cases that I reviewed. And those wins did not come on summary judgment. The employers were still almost always losing a summary judgement motion.

 

      So far, then, I see no changes in outcomes in cases before or after Encino. Now, if I was a cynic, if you were a cynic, you’d probably say that a court is gonna do what the court wants to do regardless of whether they apply a narrow or a fair interpretation. In fact, some of these courts seemed to be going out of their way to say, “Encino is not relevant here.”

 

Just let me give you some examples. The Fifth Circuit—it’s usually a very good circuit for employers—they concluded, in a case called Amaya v. NOYPI Movers, that its prior opinions on the MCA exemption enunciating and relying on this erroneous narrow construction and principle are unaffected by Encino. Why? Because those decisions were interpreting the regulations and not the statute. Now, this is really puzzling to me, especially, from the Fifth Circuit. I don’t really see the basis for differing in how you interpret a statute than a regulation. Why should we interpret the statute fairly but the regulations—which were not passed by Congress—narrowly to narrow an exemption?

 

Similarly, in the Southern District of Indiana in a case called Evans v. Distance Learning Systems, they granted the defendant’s motion for summary of judgement as to three out of the four plaintiffs, but they also stated that the Supreme Court’s recent pronouncement in Encino have no real effect because the court does not need to choose between reasonable interpretations of the statutory language.

 

We’ve also seen courts basically say our prior decisions on exemptions are all still good, and you can rely on them even though they apply that narrow construction principle. The District of D.C. and the Northern District of New York have both found that Encino is not relevant to a decision on conditional certification of an FLSA collective action.

 

      But it’s not all gloom and doom. There are some rays of hope. The Second Circuit, in a case called Munoz-Gonzalez v. D.L.C. Limousine¸ applied the Encino standard and found that the employees qualified for the taxicab exemption. So isn’t that weird the Second Circuit did it right and the Fifth Circuit got it wrong? Not normal. Also, the Eastern District of California. California, in a case called McKinnon v. City of Merced, applied Encino to exclusions from the regular rate. There are eight statutory exclusions of types of compensation that you do not have to pay overtime on, and the Department of Labor is currently working on revisions to the regulations interpreting what types of compensation you owe overtime on.

 

And so, when I found this case, that got me excited and thinking, well, why not? Why wouldn’t an interpretation of -- why shouldn’t we interpret exclusions from the regular rate fairly just as we interpret those exemptions? In my comments to the regular rate that I prepared for the chamber, I actually asked the Department of Labor to apply Encino to those regular rate exclusions. We’ll see.

 

      There’s also good news over at the Department of Labor where the Wage and Hour Division relied on Encino to issue an opinion letter, in August of 2018, that significantly expands the Section 7(i) exemption, which is an exemption for employees paid on commissions in the retail and service establishments. This is sometimes called the inside-sales exemption. So, although, the exemption doesn’t actually require an employee to sell, it just requires the employee to be paid mostly in commissions and work in a retail and service establishment.

 

      In any case, let me quote from this August 2018 opinion letter: “The United States Supreme Court recently held that exemptions, under the FLSA, deserve a fair rather than a narrow interpretation because the exemptions are as much a part of the FLSA’s purpose as the overtime pay requirement. Accordingly, WHD—the DOL’s Wage and Hour Division—must apply a fair reading standard to all exemptions from the FLSA, including the Section 7(i) exemption addressed in this letter.” DOL then went on to find for the very first time that business-to-business sales can be retail and thus allow the employer to qualify as a retail or service establishment under Section (i). Just to put this in context: for the last 50, 60 years, the DOL’s taken a position that any company whose primary business is business-to-business sales, rather than business to an individual consumer, cannot be retail. I do predict we will see more letters like this out of the Department of Labor, so now, really is the time to submit your requests for opinions on overtime exemptions—submit, submit, submit.

 

A couple more interesting issues to watch before we turn it over to questions. First, the impact of Encino on an employer’s burden of proof. The District of Maryland, in a case called Lovo v. American Sugar Refining, applied the Encino fair reading standard, but then went on to require the employer to prove the exemption by a clear and convincing evidence. Contrast that to the Southern District of Ohio, a case called Roshon v. Eagle Research Group, where applying Encino’s fair reading standard, they required the employer only to prove the exemption by a preponderance of the evidence.

 

Now, there are cases before Encino on both sides of the issue. What is the standard? What is the employer’s burden of proof on exemptions? Clear and convincing or preponderance like every other civil matter on the planet. To me, it’s pretty tough to apply a heightened burden of proof to establish an exemption after Encino. This is an issue that I would like to see wind its way up to the Supreme Court so we can get rid of this clear and convincing burden of proof standard for employers.

 

Second—and this is a little bit further afield—I’ve been discussing this with one our Labor & Employment Practice Group members, Pepper Crutcher. So, Pepper, if you’re listening, I’m actually going to talk about it. And that’s the impact of Encino on defense attorney’s fees. Now, it goes well beyond the FLSA, and Pepper really is talking and concerned about Title VII. But, really, it’s any statute that awards fees to the prevailing party, and how you interpret that term, and its 1978 decision in Christiansburg Garment Company, the Supreme Court ruled that attorney’s fees must be awarded to prevailing plaintiffs fairly routinely, whereas defendants are only awarded attorney’s fees in frivolous cases brought by employees due to some underlying, not-in-the-text policy considerations favoring Title VII claimants over defendants to Title VII cases.

 

Now, the issue was addressed again in 2016 by the Supreme Court in CRST Van Expedited case. They did reject the EEOC’s attempt to expand Christiansburg reasoning to define prevailing to mean different things, depending on who actually prevailed, and you need a complete defense win. They wanted the Supreme Court to rule to get attorney’s fees as a defendant.

 

Now, in concurring in that case, Justice Thomas connected the dots and repeated his critique of Christiansburg as a dubious precedent. Perhaps, now that we have the Encino decision, it’s time for the Supreme Court to also reconsider Christiansburg in light of Encino, which tells us that we need to interpret statutes fairly unless the text of the statute tells us differently. And, prevailing party, there’s no indication in any of these fee shifting statutes that prevailing party means something different if you’re a plaintiff versus if you’re a defendant. So another issue that we could see impacted by Encino some time in the future. And that’s my comments, and I welcome your questions and your comments about what you’ve—particularly, what have you experienced in your litigation cases citing Encino?

 

Micah Wallen:  We’ll now go to our first question.

 

Pepper Crutcher:  Hi, Tammy. It’s Pepper. Yes, I was listening.

 

Tammy McCutchen:  Okay. And why don’t you explain it a little bit further?

 

Pepper Crutcher:  Okay. So the statute, Title VII—and if you’re in your statute book right now it’s 42 U.S.C. § 2000e-5, and then you go down to e-5, and you’ll find it—it says the court is authorized to award a prevailing party attorney fees in Title VII actions. Well, that language, it doesn’t just exist in Title VII. It’s a pretty much cut-and-paste language that exists in lots of statutes, as Justice Thomas wrote in his most recent opinion about this. And, in all but one other instance, it’s interpreted literally. I mean, if you prevail legally, you’re entitled to an award of reasonable fees. It’s just in Title VII and one other statute where, for policy reasons, much like the former reading of FLSA exemptions -- for supposed policy reasons, to answer that question depends on who’s asking. If you’re a defendant, and you’re asking, your answer is you almost never get fees. If you’re a plaintiff, and you’re asking, you almost always do get fees.

 

      I’ve gotten two interesting reactions when I say this to people. One is from my fellow defense-side employment lawyers who say, “You fool. You’re gonna put us out of business.” “We need these cases filed.” [Laughter] “We must protect our phony-baloney jobs,” to quote Governor Le Petomane. The other reaction I’ve gotten from two district judges—including once in a status conference where EEOC counsel were present—is they look at me like I’m speaking a language they’ve never heard before. This concept that was expressed in Encino is so foreign to their notion of how government operates, and that it could be extended to other statutes, like the fair reading of statute could apply to all statutes. It’s literally like I’m speaking another language. They just go onto the next subject because they don’t grasp what I’ve said.

 

Tammy McCutchen:  It makes great sense to me, right? All it says is prevailing party. There’s no language in there about treating different prevailing parties differently. And I’m thinking your argument might prevail with -- as I am seeing, I’m sure other people can comment too, that the current Court is really looking at the texts, and like Justice Whyte “If it ain’t in their copy, they’re not gonna impose additional requirements.”

 

Pepper Crutcher:  I’m hoping to get to be able to argue that someday. I’d like to do it as an amicus so I don’t have to be defending a client who just lost below.

 

Tammy McCutchen:  Yeah. Yeah. But it’ll be interesting. Why would you think the impact of saying it’s the same standard for both Title VII plaintiffs and defendants in terms of attorney’s fees?

 

Pepper Crutcher:  Well, you know the impact is gonna be all the way to the Supreme Court. “Gee, that’s a clever argument and congratulations but no cigar, sonny. We’re bound by Christiansburg Garment Company, and so you don’t get prevailing fees.” Okay.

 

Tammy McCutchen:  Right. So you have to bring it in Supreme Court, and if they rule as you suggest they should, which I agree with you, we would see a lot less Title VII cases, I think.

 

Pepper Crutcher:  You’d certainly see less of the kind of cases that you and I, and all of us who do this work, see way too many of. Cases that were plainly brought only because of the prevailing fee statute where you have minor -- or in some cases, I’ve had not at all actual injuries to actual employees, but you have a technical problem with a policy or rule or employer practice. And the cases are brought, and they assign 11 lawyers to work the case and claim $800,000 in attorney fees. Those—

 

Tammy McCutchen:  And each employee plaintiff gets $100.

 

Pepper Crutcher:  Yes. So those kind of cases, I think, thereafter would be brought only by the EEOC, which doesn’t get prevailing party fees anyway.

 

Tammy McCutchen:  But, at least, have eliminated resources. Thank you, Pepper. That’s great.

 

Pepper Crutcher:  Thanks.

 

Micah Wallen:  Tammy, I’d like to ask you if -- you seem to have sort of a cynical pessimistic view of how this will end up going, certainly how the first year has gone. Do you see anything on the immediate horizon that could reverse this trend that is happening?

 

Tammy McCutchen:  I think time will reverse it. I think the Second Circuit decision, the taxicab case, is a ray of hope. But it sounds like the Supreme Court’s arbitration jurisprudence. How many cases did they have to tell employers and states in lower courts that “Yeah. We mean it. You have to implement arbitration agreements.” And so I think what we have to remember is this narrow construction principle has been around for decades. So I definitely would not say don’t give up. It’s no longer a narrow construction; it’s a fair construction -- that quotation from Encino, that should be in every defendant’s summary judgement brief.

 

But I think, also, we need not just to parrot the language, right? We have to show the courts how that impacts how they should rule—why this particular exemption needs to be interpreted to include our client’s employees. But, at least, we know, and we don’t have to contend with it. I think it’ll just take a while for courts to start really adopting it rather than just mouthing the words. [Audio cuts out 24:21] will allow more courts -- as we get more Trump appointees on the courts, it will allow those courts to actually adopt fair interpretations and not have to put their thumb on the scale towards misclassification versus exemption. So I think we just gotta keep working at it, and, hopefully, eventually, we’ll see things starting to change.

 

Micah Wallen:  I’m not seeing any other questions joining. Tammy, did you have any closing remarks for us?

 

Tammy McCutchen:  Not at all, but I will encourage people to go to that 3:30 teleforum because that decision is very confusing. It’s gonna take hours of study, so I’ll be there.

 

Micah Wallen:  All right. And on behalf of The Federalist Society, I’d like to thank our expert for the benefit of her valuable time and expertise today. We welcome listener feedback by email at info@fedsoc.org. Thank you all for joining us. We are adjourned.

 

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