When Downtown L.A. Motors Mercedes-Benz was sued for the way it was paying auto technicians, Chief Executive Darryl Holter wasn’t too worried. After all, he believed he paid his employees the same way every other auto dealer had been for decades – on a “piece-rate” basis that compensated workers per repair.

But a judge ruled the system violated labor laws, and in July, the California Supreme Court let the ruling stand by declining to review it. The decision not only forced the dealership to pay a $1.6 million judgment and millions more in legal fees, but has also triggered lawsuits against other auto dealers now susceptible to similar litigation.

“At no point did we ever think we would lose because we were doing what dealers had done in the entire nation,” Holter said. “Now, effectively every automobile dealer in the state is facing the possibility of having a lawsuit filed against him.”

Labor attorneys said at least a dozen Los Angeles County dealers have been sued over their auto technician payment policies since the Downtown L.A. Motors ruling. Among those hit since August have been Mercedes Benz of Long Beach; Keyes Mercedes in Van Nuys; Parkway Motorcars of Valencia; Sunrise Ford in North Hollywood; and Longo Toyota and Longo Lexus in El Monte, two of the largest dealerships in the region. Lawsuits were filed last year against Calstar Motors in Glendale and Keyes Toyota in Van Nuys, while the Downtown L.A. Motors case was still pending in appellate court.

Many dealers pay their technicians a flat rate per repair, but do not pay them additional wages for time spent between repairs, which the courts have now found violate minimum wage laws. Dealers said the result is that what had been standard practice in the industry has suddenly become illegal. Worse, the statute of limitations on these cases is four years, leaving most dealers vulnerable even if they adapted their payment schemes in the wake of the ruling.

What’s more, Holter said he is not actually paying his employees more now than they would have been under the old system, having added an hourly wage but reduced per-repair payments.

But Neal Fialkow, a Pasadena attorney who won the case against Downtown L.A. Motors and last month filed two more cases against dealers, said it ensured workers were paid fairly. He rejects the idea that his case was causing a fundamental shift in dealers’ businesses, saying many of them were already compliant and accusing dealers of exaggerating the negative impact.

“If you hire an employee to work at a job, he should be paid for every hour that he works,” he said. “That’s fundamental fairness.”

Big loss

Downtown L.A. Motors, part of a network of seven dealerships owned by downtown’s Shammas Group, paid technicians on a piece-rate basis. For a given job, a technician would accrue a certain number of standard credits, or “flag hours” – fixing brakes on a certain model, for instance, would earn 1.5 flag hours – regardless of how much time the task actually took. Depending on experience, the technician would be paid $17 to $32 per flag hour accrued. Those technicians who worked fast and accrued, say, 10 flag hours in an eight-hour day took home more pay than a slower technician who accrued six.

Holter said the average technician at the Mercedes-Benz dealership made $57,000 last year, while four of the roughly 40 technicians were paid more than $100,000.

Workers were not directly paid for their time waiting between jobs while on site, but they were guaranteed double the minimum wage. That’s because if they didn’t get enough repair work to make double the minimum wage, the dealership would pay the difference.

Holter believed this practice, which he and the California New Car Dealers Association said is standard, would be compliant with minimum-wage laws. But a class-action lawsuit was filed by 108 technicians who worked at Downtown L.A. Motors from 2002 through 2008, and in 2011, a Los Angeles Superior Court judge awarded $1.6 million in lost wages and an additional $240,000 penalty for failure to pay other wages when employees were terminated. In April, the California Court of Appeal upheld the decision, ruling that the dealership was not allowed to avoid paying employees for waiting time, even if average compensation over a given pay period exceeded the minimum wage. Three months later, the state Supreme Court declined to review it further.

Attorneys representing dealerships and dealership associations said the loss opened the door for further lawsuits.

“We’ve seen a dramatic increase in the number of class-action lawsuits filed,” said Lonnie Giamela, an attorney who has represented two local dealers sued for piece-rate payment of workers. “This allows plaintiff’s attorneys to go back four years. It can be retroactive.”

Giamela added that the cases have typically settled in the six- to seven-figure range.

David Yeremian, who according to court records settled a piece-rate case against Calstar Motors earlier this year, filed his lawsuit after the initial ruling against Downtown L.A. Motors.

Yeremian, who declined to discuss the specifics of the case, said, “When you get a decision like this that’s cemented (in appellate court), I don’t want to say it opens up the floodgates of litigation, but you embolden lawyers to move forward.” However, he thought the cases would fade out once dealerships changed their practices.

Other sued dealers did not return requests for comment from the Business Journal.

Though the laws could apply to any auto technician or employee paid on a piece-rate basis, so far most of those targeted have been auto dealers, as they are usually larger than independent repair shops and are thought to have deeper pockets. In addition, some technicians at smaller repair shops are paid only an hourly rate. Giamela, however, said he had also settled a similar case outside of the auto industry, involving a logistics company that paid employees on a piece-rate basis.

Changes?

The multimillion-dollar loss represented a financial blow to Holter’s Shammas, but it did not push the company into the red, as car sales have rebounded strongly. Revenue at the Mercedes-Benz dealership, Shammas’ largest, were $193 million last year, up from $178 million the previous year, according to Business Journal research.

Shammas changed its payment system after the loss. Now, technicians there are paid according to a hybrid model – all are paid a minimum wage and then paid a performance bonus based on flag hours. But the payments for each repair are lower, so that employees make the same amount they would have under the previous system.

Brian Maas, president of the New Car Dealers Association, said that was typical of most changes so far.

“At most of the dealers we’ve spoken with who have implemented changes, the employees are getting paid exactly what they were being paid before,” he said. “Which of course raises the question of why are we going through this exercise if everybody’s paid the same amount?”

Fialkow said that was beside the point.

“Whether they’re making more or not making more, is that really the issue?” he said. “The issue is they were being taken advantage of. They were told to stay someplace and weren’t getting paid for being there.”

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