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Automotive Wage Compliance In The Dealership: Minimum Wage Law Does Apply

Recent government reports show that wage and hour charges and litigation are rapidly increasing, even outpacing discrimination and harassment charges. Unfortunately, automotive dealerships, with the wide variety of jobs and pay plans, are a perfect place for these kinds of charges to develop. Staying compliant with wage and hour laws can seem daunting, but it can be handled with a little understanding and some good record keeping. Two major areas where many dealerships can find themselves in trouble under the Fair Labor Standards Act (FLSA) are minimum wage and overtime.

The FLSA is the federal law that details standards for the basic minimum wage and overtime pay. It covers employers who have at least $500,000 per year in gross sales and/or whose employees are regularly involved in interstate commerce. Some of you may have just read that last sentence and thought, "Well, this doesn't apply to me. I don't need to worry about this."

However, you do need to worry, maybe more so than those who do qualify. Those of you who do not meet these criteria, go ahead and follow the rules set forth anyway for two reasons. First, if you do not meet the sales requirement, you probably want to grow your business and someday exceed $500,000 in gross sales. By  following these rules before you reach that mark, you will not have to make the switch down the road, eliminating the possibility of problems when you do reach the sales threshold. Second, even if you only sell one vehicle to someone out of your state, you are now a participant in interstate commerce. Since you cannot know where all of your customers are coming from, it is better to plan ahead and comply with the FLSA compliance now, rather than after it is too late.

The rules for paying minimum wage and overtime under the FLSA are actually very simple. As of July 24, 2007, the federal minimum wage was increased to $5.85 per hour, with additional 70-cent increases scheduled in 2008 and 2009. This means all of your employees must be paid at least $5.85 per hour. The overtime provision of the FLSA states that any hours worked in excess of 40 hours per week must be paid at one-and-one-half times the regular pay rate. Therefore, employees that make minimum wage should receive $8.78 per hour for any hours worked in excess of 40 hours in one week. Sure that’s simple and straightforward, but there are other issues to consider.

The issues resulting from the above rules are rarely brought to the attention of the Department of Labor (DOL). The problems usually stem from the dozens of exceptions to these rules that allow a company to classify certain jobs as "exempt" from the rules. Failure to properly classify your employees as exempt or non-exempt can result in DOL audits, lawsuits and civil fines. To avoid these things from happening at your dealership, you should know the exemptions that you will likely be taking advantage of.

Despite the dozens of exemptions to the provisions of the FLSA, only seven are commonly used in an automotive dealership, and all seven are exemptions to the overtime statutes rather than minimum wage. This means that the FLSA rules of one-and-one-half times the regular pay rate for hours worked in excess of 40 hours do not apply. Four of these exemptions: executive, administrative, professional and computer-related are used by almost all businesses. The other three: automotive sales, parts personnel and mechanics are specific to the retail automotive industry. Each of these exemptions has specific tests to pass in order to qualify. Below is a review of each of the exemptions. Once you are familiar with the specific qualifications, you should review the positions you are currently considering exempt from the overtime provisions to make sure they truly are exempt. 

This exemption is probably only common in the largest dealerships and, as stated above, would include computer programmers and software developers.

These four exemptions are common across all industries and are the most familiar to people when they hear the phrase "exempt status." It's important to note that for any of these exemptions, the individual employee must meet all of the testing standards. You will not be compliant if they only meet some of the requirements.

The exemptions specific to automotive dealerships (automotive sales, parts personnel, and mechanics) do not have detailed tests, as the others do, but they do have specific definitions.

For an employee to be classified as exempt to the overtime provisions of the FLSA under the Automotive Sales exemption, they must be "an employee who is employed for the purpose and is primarily engaged in making sales or obtaining orders or contracts for sale of vehicles." Additionally, at least 50 percent of their compensation must come from a commissioned sales program. Almost all automotive salespeople will qualify for this exemption.

The second automotive dealership specific overtime exemption is for Parts Personnel. Employees who qualify for this exemption are defined as "any employee employed for the purpose of and primarily engaged in requisitioning, stocking and dispensing parts." This is a very simple definition that should encompass almost all parts personnel.

The final exemption specific to automotive dealerships, Mechanics, is defined as "any employee engaged in doing mechanical work in the servicing of an automobile, trailer, truck..." This definition goes on to state that it does not apply to employees who primarily perform work such as washing, cleaning, tire changing or lubrication; therefore lube technicians and detail staff would not be covered under this exemption. Basically, only your fully-trained automotive technicians qualify under this exemption.
Also note that the FLSA specifically describes a group of employees in automotive dealerships that do not qualify for overtime exemptions. The law states, “Employees variously described as … service writer, service advisor or service salesman … are not exempt.” This is probably one of the most common exemption mistakes made in an automotive dealership.

Having now defined the overtime exemptions under the FLSA that would apply to your dealership, you need to know why these specifically need to be reviewed. The DOL does not have any problem with you choosing not to classify an employee as exempt from the overtime statutes. They would be perfectly happy if you wanted to pay everyone an hourly rate—including overtime pay. What the DOL does have a problem with is if you incorrectly classify someone as exempt when they should not be. This situation would cause the employee to be underpaid based on the law. Your dealership would then be in violation of the FLSA and would subsequently be investigated by the DOL to some degree.

The most common outcome of such an investigation would be your dealership having to provide back pay to the employee in question as well as paying a civil fine, often 2-3 times the amount owed to the employee or more. The worst-case scenario for your dealership would be for the DOL to choose to audit your entire payroll, usually for the past three years, and issue a determination against your pay practices for all employees. Obviously, this is likely to locate other discrepancies because if you have one, you probably have more, which would result in additional fines. This is the outcome  of a government investigation only. You could possibly be setting yourself up for litigation from the employee and all the associated costs.

No business wants to deal with these issues, especially when are easily avoided by reviewing the tests for the exemptions and making sure the employees you have classified as exempt really are.

While there are minimum wage exemptions that an automotive dealership might be able to take advantage of, it’s not usually in the dealerships best interest to use them for two reasons: One, because the administrative work and record keeping necessary to qualify for these exemptions are typically not worth the effort; and two, it is practically impossible to find good employees when you are paying less than minimum wage.

There are, however, other things to consider when dealing with minimum wage. Specifically, the fact that all employees must receive at least minimum wage at all times. For your hourly and salaried positions, this is hardly ever an issue. They typically have a set number of hours per week and receive the same pay throughout. Where minimum wage issues can surface is in your salespeople and service technicians.

Salespeople and service technicians are rarely paid on an hourly basis, and their wages fluctuate, sometimes significantly, depending on the work they perform. Management at the dealership often fails to keep track of the hours that salespeople and service technicians work. These factors combine to create a situation where compliance is often ignored.

For example, if you have a salesperson that works eight hours a day, six days a week and only makes one sale resulting in $400 of commission for the two-week pay period. You pay him his $400 and believe there isn’t an issue because you paid him what he earned. Actually, this is a compliance issue regarding minimum wage regulations.

Minimum wage provisions would dictate since he worked 96 hours in that pay period, he should receive $561.60. Therefore, as the employer, you would be responsible for making up the difference between his commission wage and the minimum wage. You can also see how this could occur if a service technician were earning book rate for his work, but for some reason the repairs took far longer that the book time period listed.

Minimum wage charges are among the easiest to avoid by simply keeping track of the hours worked by employees who are not paid based on a regular rate. Have your sales and service staff clock in and out each day. Then, when the pay period ends, determine the average hourly wage. If it is below the minimum wage rate, adjust it accordingly to comply.

It would be a good idea to briefly mention that all the aforementioned information is related to federal laws only. Each state has their own individual rules regarding overtime and minimum wages. While most are very similar to the federal regulations, differences are out there. It’s highly recommend that you contact your state’s Department of Labor for information on the laws applicable in your area. 

Take some time to review your own pay practices, and determine if you are in compliance with the Fair Labor Standards Act. By addressing overtime exemptions and minimum wage standards proactively, you can avoid the vast majority of compensation-related charges and litigation, saving your dealership both time and money.

 Vol 4, Issue 11

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