Exemptions and Limits: Recent Appellate Decisions Limit Exposure to Payroll Liability


The pendulum of enforcement of wage and hour claims appears to be swinging toward protecting employers against undue liability.  In the past few weeks, the U.S. Supreme Court has generously interpreted an exemption to the Fair Labor Standards Act overtime requirement, to include service advisors at automobile dealerships.  A few weeks after the National Labor Relations Board reinstated the Obama-era Browning-Ferris decision (for now) easing the test for finding joint employer liability, California appellate courts in two cases involving joint employers have protected, in one case, a staffing company, and in a second case, a client of a staffing company, against wage and hour liability.

The lessons of these cases are:

  1. Employers can expect the United States Supreme Court to give a less aggressively employee-oriented interpretation to wage and hour laws and regulations, but employers are still best served by carefully adhering to the applicable rules.
  2. Employers and staffing companies should carefully review their agreements with each other to be clear on which party is responsible for establishing and enforcing policies to comply with wage and hour laws. Employers and staffing companies should consider including in their agreements representations and warranties of compliance with wage and hour laws, as well as indemnification provisions.
  3. To minimize risk of liability for wage and hour violations, employers should assure that they are in compliance with those laws, even if the staffing companies they use are not vigilant in such matters. And staffing companies should assure that they are doing what is necessary, to the extent feasible, to comply with such laws with regard to employees they place.

Encino Motor Cars:  Service Advisors Employed by Auto Dealers Are Exempt Employees.

In its April 2, 2018 decision in Encino Motorcars, LLC v. Navarro, the U.S. Supreme Court held that service advisors employed by automobile dealerships are exempt from overtime pay requirements under the federal Fair Labor Standards Act (“FLSA”), 29 U.S.C. § 201 et seq.  Section 213(b)(10)(A) of the FLSA “exempts from its overtime-pay requirement ‘any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles . . . , if he is employed by a nonmanufacturing establishment primarily engaged in the business of selling such vehicles . . . to ultimate purchasers.”  In this case which involved statutory interpretation and construction of the FLSA exemption provisions, the Court reversed a decision by the U.S. Court of Appeals for the Ninth Circuit, which had narrowly interpreted the exemption to exclude service advisors.

This was the second time the case had come before the Court.  In a 2016 decision, the Court had held that it was error for the Ninth Circuit to defer to a 2011 U.S. Department of Labor regulation that had stated that the term “salesman” in section 213(b)(10)(A) of the FLSA excluded service advisors.  According to the Court, the regulation “undermined significant reliance interests in the automobile industry by changing the treatment of service advisors without a sufficiently reasoned explanation.”  In the prior case, the Court had left open the issue of whether, absent such deference, the term “salesman” included service advisors.

In the current case, after explaining that “[s]ervice advisors ‘interact with customers and sell them services for their vehicles,’” the Court held:  “Under the best reading of the text, service advisors are ‘salesm[e]n’ and they are ‘primarily engaged in . . . servicing automobiles.’”  In reaching this conclusion, the Court relied on the “ordinary meaning” of “salesman,” in part based on the definition of the term in the Oxford English Dictionary.  Relying on the definition of “servicing” in same source, the Court explained that service advisors “are integral to the servicing process.”

The Court rejected the Ninth Circuit’s invocation of the “distributive canon” of interpretation, by which the lower court had matched the statutory term “salesman” with “selling” and the terms “partsman” and “mechanic” with “servicing,” thereby concluding that the FLSA excluded service advisors (salesmen who were primarily engaged in servicing automobiles) from the overtime-pay exemption.  According to the Supreme Court, under the ordinary, disjunctive meaning of “or” in the statute, the term “salesman” could be matched with “servicing,” and, thereby, include service advisors in the exemption.  And the context of that provision “favors the ordinary disjunctive meaning of ‘or’”:  “narrow distributive phrasing” under the distributive canon was “unnatural,” because “the entire exemption bespeaks breadth.”  In sum, the “more natural reading is that the exemption covers any combination of [the statute’s] nouns, gerunds, and objects.”

Moreover, the Court rejected the principle applied by the Ninth Circuit “that exemptions to the FLSA should be construed narrowly.”  Because the text of the statute gives no indication “that its exemptions should be construed narrowly,” courts should give them “a fair (rather than a ‘narrow’) interpretation.”  (Citing A. Scalia, Reading Law.)  The lack of any reference in the statute’s legislative history to service advisors was not persuasive in excluding service advisors from exemptions, in light of a fair reading of the clear statutory text.  “If the text is clear, it needs no repetition in the legislative history; and if the text is ambiguous, silence in the legislative history cannot lend any clarity.”

SerranoStaffing Company that Provides for Meal Breaks Held Not Liable for Failure of Employees to Take Such Breaks at Company at which They Are Placed.

In Serrano v. Aerotek, Inc., __ Cal.App.5th __, 230 Cal.Rptr.3d 802 (March 21, 2018), a California Court of Appeal held that Aerotek, a staffing agency that had placed temporary employees with its client Bay Bread, LLC, was not liable for meal breaks missed by those employees.  The Court based its conclusion on two grounds:  (1) Aerotek had satisfied its obligations under Brinker Restaurant Corp. v. Superior Court (2012) 53 Cal.4th 1004, 1041, to provide meal periods, and (2) Aerotek could not be held vicariously liable as a joint employer, with Bay Bread, of the employees, because, under Brinker, Aerotek’s provision of compliant meal periods precludes liability even if it was aware that its employees were not taking the breaks.

The facts establishing that Aerotek had satisfied its Brinker obligations included that, in addition to having a compliant meal period policy, its contract with Bay Bread “required Bay Bread to comply with applicable laws, Aerotek provided its meal period policy to temporary employees and trained them on it during orientation, and the policy required them to notify Aerotek if they believed they were being prevented from taking meal breaks,” and prohibited retaliation resulting from such a notification.

Aerotek could not be held vicariously liable even if, as the Court assumed, it was a joint employer with Bay Bread, because the determination of whether a joint employer is liable under the California Labor Code for a violation by its co-joint employer depends not on principles of agency or joint and several liability, but rather on “the duties imposed under the particular statute at issue.”  Under section 226.7 of the Labor Code and Brinker, whether an employer is liable for a co-employer’s violations depends on the scope of the employer’s own duty under that provision.  The applicable wage order governing meal breaks contained no provision imposing liability on an employer “for a co-employer’s breach of the co-employer’s own duty to provide compliant meal periods.”

Castillo:  Settlement of Wage and Hour Class Action Against Staffing Company Bars Subsequent Claims Against Client Companies.

In a case decided a few weeks after Aerotek, the California Court of Appeal, in Castillo v. Glenair, Inc., ___ Cal.App.5th __, 2018 WL1790683 (Apr. 16, 2018), held that a wage and hour class action lawsuit brought against a company by an employee placed at the company by a staffing company was barred by the settlement of a prior class action against the staffing company, which had included a broad release of the agents of the staffing company, as to the very same claims asserted in the pending case against the company where the employees had been placed.

In the prior case, a different plaintiff represented by different attorneys had filed a complaint asserting class claims against staffing company GCA Services Group of Texas, L.P., for unpaid minimum wages, overtime wages, meal and rest break violations, related Labor Code violations and unfair business practices under section 17200 of the Business and Professions Code.  The agreement settling that case was on behalf of all class members, generally listed ten wage and hour claims as “Released Claims,” and included “agents” of GCA among the “Released Parties”.  Castillo, the representative plaintiff in the pending Castillo v. Glenair case did not opt out of the settlement of the prior case, as had been permitted by the order approving the Settlement.

In Castillo, Glenair moved for summary judgment, based upon the settlement of the prior case.  The trial court granted the motion, and the Court of Appeal affirmed, concluding that the claims were barred by the doctrine of res judicata, based upon the settlement of the prior lawsuit, for two reasons.

First, the Court concluded that Glenair was “in privity” with GCA.  In other words, the subject matter of the pending case and the prior case was the same – “namely, both cases involve the same wage and hour causes of action arising from the same work performed by the same GCA employees (the Castillos) at GCA’s client company Glenair.”  And both companies were responsible for payment of their wages, with respect to which any errors were corrected by the settlement of the prior lawsuit.  “[W]ith respect to the Castillos’ wage and hour causes of action, the interests of Glenair and GCA are so intertwined as to put Glenair and GCA in the same relationship to the litigation here.”

Second, the Court concluded that, because Glenair was an agent of GCA “with respect to GCA’s payment of its employees” (including the Castillos), the release included in the settlement of the prior lawsuit explicitly reached agents of GCA.  “… GCA authorized Glenair [as its agent] to collect, review, and transmit GCA employee time records to GCA” for purposes of GCA making appropriate payments of compensation to its employees.[1]

[1]           It is unclear whether, under the arrangement between Aerotek and Bay Bread in Serrano v. Aerotek, Inc., Bay Bread would have been found to have been an agent of Aerotek, because Aerotek had an account manager on Bay Bread’s site, who reviewed time records of temporary Aerotek employees, and Bay Bread was not as involved in collecting information for payroll for Aerotek.

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