Auto Mechanics and Technicians
FLAT OR FLAG RATE SYSTEM
Within the context of the automotive repair industry, many mechanics (or technicians) are compensated under a flat-rate or flag-rate system. Under such a system, each job is assigned a certain number of hours for which the customer is charged, regardless of the actual time it takes to perform the job. The mechanic may actually work greater or fewer than the assigned hours, but he or she will be paid only for the number of he or she "books" rather than the actual hours he or she works.
In May 2009, in a case handled by attorney Greg McGillivary of McGillivary Steele Elkin LLP, the United States Court of Appeals for the Sixth Circuit affirmed a ruling of the U.S. District Court Tennessee finding that certain automotive mechanics and technicians paid on a flat-rate or flag-rate are entitled to overtime under the Fair Labor Standards Act (FLSA). Wilks v. The Pep Boys, 11 Wage & Hour Case. 2d 1554 (6th Cir. 2009).
Three points are noteworthy about the decision. First, the auto mechanics and technicians were employed by an auto repair shop rather than a retail auto dealer. There is a specific exemption to the overtime requirements of the FLSA for retail auto dealers (though not those who sell predominantly to wholesalers) who sell cars and trucks to the public. Second, the flat rate system at issue in Wilks did not provide a separate labor charge to customers that was proportional to the amount the customer was charged under the company's pricing scheme. Instead, the labor charge was directly proportional to the amount paid to the mechanic under the flat rate system. Third, the requirements of some state wage laws do not permit flat rate systems to exempt the employer from paying overtime regardless of how the system is designed. Thus, in some states all flat rate employees must be paid overtime. Remember, state laws can always provide greater benefits to workers than the federal law.
Section 7(i) of the FLSA provides an exemption from the overtime pay requirement for any employee of a retail or service establishment if:
1. The regular rate of pay of such employee (i.e., his hourly rate) is in excess of one and one-half times the minimum wage, and
2. More than half of the employee's compensation for a representative period (not less than one month) is from commissions on goods or services.
The phrase "commissions on goods and services" is not defined in either the statute or its implementing regulations. The Department of Labor has acknowledged that, in some cases, the flat rate system constitutes a commission under section 7(i) and in other cases it constitutes a piece-rate or job-rate system. Employees paid on a piece-rate or job-rate are unquestionably entitled to overtime under the FLSA.
In Wilks, the Middle District of Tennessee, relying partly on a 2003 decision by the Western District of Washington (Huntley v. Bonner's Inc.), refined the distinction between flat-rate pay systems that are properly considered "commissions" and those that are actually piece-rate or job-rate systems. After reviewing the Department of Labor opinion letters, Field Operations Handbook, and the few reported decisions addressing section 7(i), the court concluded that to qualify as a "commission" under the exemption, the employer must compensate employees at a rate that is proportionally related to the amount it charges its customers. Pep Boys failed to produce evidence that the system it uses to compensate its flat-rate mechanics and technicians met even the rudimentary standards of proportionality identified by the court.
If you are an automotive mechanic or technician with questions about how these issues apply to your individual situation feel free to contact McGillivary Steele Elkin LLP by filling out our questionnaire or write to us at:
McGillivary Steele Elkin LLP
1101 Vermont Avenue, N.W.
Washington, D.C. 20005