When a Texas dealership group and a Stellantis store resolved a class action suit alleging underpayment of wages and overtime to detailers, porters, valets, shuttle drivers and car washers employed by a now-defunct company, the settlement reflected a legal and financial dilemma confronting dealerships that rely on outside contractors for fixed ops services.
And when a Texas vendor that supplies detailer, valet and car wash services agreed to pay $166,435 to close a U.S. Labor Department employee misclassification complaint, that settlement averted potential claims against the vendor’s dealership clients.
In the first case, a settlement reached earlier this year by Sonic Automotive Inc., several of its Texas dealerships and Gulfgate Dodge-Chrysler-Jeep-Ram in Houston meant a judge didn’t need to decide a thorny question: Was Rascoa LLC, an independent contractor that had hired the workers, solely responsible for personnel management and compensation, as the dealerships argued? Or were Rascoa and the dealerships joint employers under federal labor law?
The workers, eight of whom are sharing proceeds of a confidential settlement, claimed the dealerships were joint employers with Rascoa, which is out of business. They received uniforms and badges with individual store logos, and their suit asserted the stores had joint authority to hire, fire and supervise them, set schedules and control pay rates and work conditions.
In the second case, resolved in July, Majestic Dealership Services Inc. had treated workers who were actually employees as independent contractors and failed to pay them overtime.
Tillman Coffey, a partner in Atlanta law firm Fisher Phillips, told Fixed Ops Journal that dealerships can take steps to head off such problems, especially those that arise when a vendor goes belly-up or has no assets.
It’s increasingly common for stores with a lot of turnover among fixed ops support staff to look to outside contractors, he says. “Over the years, I’ve seen a number of these relationships that are fairly informal,” he says.
A crucial starting point is a comprehensive written contract “with a company that looks like a company, has workers’ compensation and other insurance, is registered with the state and has a formalized payroll system.”
“You want an outside vendor that appears to be a legitimate business,” Coffey says.
The contract should lay out the nature of the relationship between dealership and vendor, requiring the outside company to supply evidence it has all necessary licenses and mandating detailed invoices. The vendor should agree to indemnify the dealership for claims arising from its services, including claims for unpaid or underpaid wages, he adds.
To avoid the appearance of a joint employer, dealerships must be careful not to become too involved in managing and supervising vendor employees, Coffey says. While dealerships have the right to give instructions, such as determining how many vehicles will be detailed daily, they shouldn’t be inspecting vehicles or telling vendor personnel how to do their work.
“Make sure there is a clean line so an objective person would say it is really an independent contractor,” he says.
Coffey recommends contracting with companies that provide services for multiple dealerships. “You don’t want to have a captive vendor,” he cautions.
In addition, dealerships should ensure their own wage and hourly practices comply with federal and state laws, Coffey says. That includes periodic audits to verify all employees are classified and paid correctly and that payroll records are properly retained.
The U.S. Labor Department has vowed to aggressively enforce wage and hour laws.
For example, in announcing the Majestic Dealership Services settlement on behalf of 106 workers, a department official warned: “Employers who misclassify workers deny them their full wages, benefits and legal rights, avoid payments of payroll taxes which cheats all taxpayers and gain an unfair and illegal competitive advantage over employers whose pay practices abide by the law.”
Coffey notes the terms of employment practice liability insurance policies vary, and some don’t cover wage and hour claims. Even with such coverage in the policy or rider, it’s uncertain whether a carrier would reject coverage of claims by a vendor’s employee.
Dealerships may agree to settle back wage complaints and suits even if they believe they aren’t joint employers with their vendors, he says.
“Sometimes it’s cheaper and more final just to pay rather than have lengthy litigation with the government,” Coffey says, observing the amount of potential wages in dispute is often insignificant relative to the cost of attorney fees. “It may be easier to move on.”