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.

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.

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. 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. 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”. 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. 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. 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 $ 455.00 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. 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. In order to meet the Salary Level Test, an employee must receive a salary of at least $ 455.00 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 $ 27.63. 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. Administrative- primary duties must include the performance of office or nonmanual work directly related to the management or general business operations of the employer or the employer’s customers. These duties should include exercising discretion and judgment with respect to matters of significance. Professional-primary duties must include the performance of work that requires advanced knowledge in a field of science or learning and must be customarily acquired by a prolonged course of specialized education. Employees that perform essentially the same duties and have the same knowledge as employees that have degrees, but attained their advanced knowledge through a combination of work experience and education can also qualify for this exemption. Computer Professionals- primary duties include the performance of work related to systems analysis, systems and software programming and engineering and other similarly skilled work. Employees that perform work related to the manufacture or repair of computer equipment are not exempt under this provision. Outside Salesperson- primary duties include making sales or obtaining orders or contracts for services or for the use of facilities for consideration that is customarily and regularly engaged away from the employer’s place of business. Sales must be made at the customers place of business and sales made by mail, phone or through the internet do not qualify if the employee does not make a personal appearance at the customer’s place of business. The salary requirements of this exemption (The Salary Basis and Level Tests) do not apply to outside salespersons. Miscellaneous exemptions include an exemption for an employee holding a valid license or certificate permitting the practice of law and is actually engaged in the practice of law and highly paid employees (annual compensation of at least $ 100,000) that do not qualify for the executive, administrative or professional exemption, but perform at least one of the exempt duties of the executive, administrative, or professional employee.

Summary The following is a summary of the exemptions that have been discussed and typical employees of an automobile dealership that may qualify for the exemption: Salesmen, Partsmen and Mechanics Exemption This is an exemption from overtime requirements. Employees may include commissioned vehicle salespersons, service writers or service advisors, service mechanics, parts counterperson including wholesale parts salesperson, body shop mechanics or metal men. Commission Employees of Retail or Service Establishments This is an exemption from overtime requirements. Employees may include finance and insurance salespersons or managers, body shop painters, vehicle detailers. White Collar Exemptions This is an exemption from minimum wage and overtime requirements. Employees included in the executive exemption may include dealer, general manager, sales manager, service director, service manager, parts manager, body shop manager, finance and insurance manager, leasing manager, CFO. Employees included in the administrative exemption may include office manager or controller, personnel manager or HR, finance and insurance manager or salespersons, body shop estimators. Employees included in the professional exemption may include accountants and lawyers. Dealerships usually do not employ anyone that would qualify for the computer professional exemption. Employees included in the outside salesperson may include outside parts or service salesperson, outside fleet salesperson.

Record Keeping The following records should be kept for all employees: Name and identifying Number Address and zip code Date of birth if under 19 years of age Sex Occupation Additionally, the following records should be kept for all non-exempt employees: Established work week Rate of pay Hours worked each day and work week Total work week regular pay Total work week overtime pay Total additions to and subtractions from weekly pay Rate of pay used to compute overtime Total wages paid each work week Date of payment of wages and period covered Date of entering and leaving employment Output of employee if paid on basis other than time Flat rate repair orders and tickets Special information for employees paid on uncommon pay arrangements. These records should be kept for a minimum of three years from the date of payment.

Poster Display Every employer that is covered under the FLSA is required to display the FSLA poster on minimum wage, overtime compensation and child labor in a conspicuous place for employee review. The posting or failure to post these materials may have an effect on when the statute of limitations begins with respect to a claim made under the FLSA.

Penalties Employers that are found in violation of the FLSA minimum wage or overtime requirements are liable for unpaid wages and for an additional equal amount for liquidated damages. Additional penalties may apply for failure to meet record keeping requirements, and failure to meet posting requirements. Documented internal and external preventative measures may mitigate an employer’s FLSA liabilities.

Action Plan Dealership management should develop a written policy to insure it is in compliance with the FLSA. This policy should include guidelines that need to be taken to develop in-house awareness, encourage managers and other employees to ask questions or raise concerns and provide training and support for frontline managers and payroll staff. Also, the policy should include an employee complaint mechanism to handle and resolve employee wage complaints and preventative compliance audits that are intended to identify issues for resolution.

The preceding is presented for information purposes only and is not intended to be a comprehensive listing of all wage laws. Additionally, applicable laws and regulations are subject to change. If you have questions related to any subject in the preceding information you can contact the author, Lou Galbraith AutoDealerCFO at the email address [email protected].