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6 Legal Challenges for California Dealers

California auto dealers and their employees are on a litigation collision course. Attorney lists six problem areas to discuss with counsel.

August 2017, F&I and Showroom - Feature

by Alejandro David Szwarcsztejn

Auto dealers today face numerous business challenges in their drive to stay afloat: a fast-evolving consumer, increased competition from new sources, and tighter margins on each deal, to name a few. California auto dealers must add to that list a wave of new employment laws and regulations that significantly impact how they manage the labor side of their business.

These new legal requirements not only increase the cost of labor and legal compliance, they create exposure to prohibitively expensive lawsuits from employees. The following six trends in employment laws, in particular, are revving up this increased risk of litigation for auto dealers across California.

1. Changes in the Interpretation of FLSA Exempt Classifications
The federal Fair Labor Standards Act (FLSA) excludes several types of auto dealership employees from its overtime requirements. Among them are those who are “primarily engaged in selling or servicing automobiles.”

For decades, auto dealers relied on guidance from the U.S. Department of Labor stating that service advisors were exempt from overtime requirements under that provision. In 2011, the federal agency reserved its position and said service advisors were entitled to overtime pay. Not surprisingly, employee lawsuits followed.

In January of this year, the Ninth District Court of Appeal issued a ruling in one of these lawsuits, Navarro v. Encino Motorcars, agreeing with the Department of Labor’s reversal. The court reasoned that the overtime exemption covers employees who sell cars or service them, but not those who sell services for cars.

The Navarro decision is in conflict with appellate decisions elsewhere in the country. It is not yet known whether the U.S. Supreme Court will step in to resolve the conflict. In the meantime, the Ninth Circuit’s decision is the law of the land in California, meaning that dealerships must comply with its terms or risk misclassification lawsuits from former or even current employees.

2. Rest Break Pay Requirements for Commissioned Salespersons
Only one month after the Navarro decision, auto dealers were hit with another compensation headache. In Vaquero v. Stoneledge Furniture LLC, a California court of appeal ruled that state law requires employers provide separate, additional pay to commissioned salespersons for the time they spent taking statutory rest periods required by California law.

In other words, unlike other tasks salespersons perform relating to their sales duties, rest breaks are not considered as paid by the commissions salespeople earn. This means dealerships must now track the amount of time salespeople spend each day taking statutory rest breaks and pay them separately for that time. Due to the numerous penalties that may be sought for rest break and pay violations, what may appear to be a small difference in pay can quickly become a costly ­mistake.

3. California’s Fair Pay Act
The California Fair Pay Act, which forbids employers from gender-based discrimination in compensation, has been significantly amended twice in the last two years. In 2016, the law was expanded to broaden its scope. Now, all employees who perform “substantially similar” work (even if they have a different title or position) are included when conducting a pay comparison to determine if there is a violation. The law was also expanded to include new recordkeeping requirements.

In 2017, the law was expanded again, this time to extend its application to pay disparities based on race or ethnicity. Employers with less gender or ethnic diversity in positions seen as traditionally dominated by white males are likely to see more agency action and employee litigation.

4. Local Ordinances on Minimum Wage and Sick Leave
More than a dozen municipalities in California — from Los Angeles to Berkeley to Pasadena to San Jose — are leading a national trend of setting local minimum wage requirements that are higher than those in national and statewide minimum wage laws. These local ordinances vary widely in terms of the hourly rates imposed, the employers to whom they apply, and their effective dates of application and future increases.

Dealers who own groups with operations in more than one of these municipalities (or any cities that join the trend in the future) must track their compliance with these requirements to avoid being hit with costly wage and hour litigation. In such cases, an employee will seek not only back wages but several types of derivative penalties that can easily exceed the amount owed in unpaid wages.

5. New Rules for Workplace Harassment Training
New California regulations went into effect on April 1, 2016, that raise the workplace harassment training and complaint procedure requirements applicable to all employers. Regulations previously in place required all employers with 50 employees or more to ensure that all their supervisors receive legally compliant training in various topic areas relating to workplace harassment.

The new rules now add to these content requirements by requiring that the training cover abusive workplace conduct, legal remedies available to harassment victims, supervisor obligations, and strategies to prevent and remedy harassment. In addition, auto dealers must comply with stricter recordkeeping requirements with respect to the harassment training they provide to their supervisors.

6. PAGA Representative Actions
California dealers also face the statewide trend of employees filing representative actions under the California Labor Code’s Private Attorneys General Act (commonly known as “PAGA”). Although the PAGA statute has been law since 2004, plaintiff’s attorneys only recently started to litigate these cases with force. This has been partly in response to a decrease in class-action opportunities due to many employers adopting arbitration agreements which include a ban on employee pursuing their wage-related claims as a class action lawsuit.

California courts have ruled that a PAGA action is not subject to these types of bans in arbitration agreements. In a PAGA action, the employee seeks to collect penalties on behalf of the state for a variety of wage and hour violations, with 25% of the penalties collected being paid to aggrieved employees as a “bounty hunter” fee. The potential exposure to PAGA penalties can be very significant for employers with a large workforce or substantial employee turnover, because they are calculated on a per-employee and per-violation basis.

Effectively responding to these and other changes in employee law requires that dealers devise a strategy that is not only compliant but business-smart as well. In many instances, small changes to existing policies or procedures may be all that is required to remain compliant. In other scenarios, it may be necessary to consider more drastic changes, such as restructuring compensation for certain employee groups, in order to avoid runaway increases in payroll costs or burdensome administrative processes.
Either way, it is essential that management partner with experienced counsel who understands the unique features and challenges of a dealership’s business.

Alejandro David Szwarcsztejn is an attorney at Carothers DiSante & Freudenberger LLP, a California statewide law firm focused on labor, employment and immigration. Email him at

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