January 18, 2024
By Barrie Charapp Beaty
Mahdavi Bacon Halfhill & Young, PLLC
“The nine most terrifying words in the English language are: I'm from the Government, and I'm here to help.” - Ronald Reagan. 2023 marked the year that federal authorities passed laws and regulations that effectively have widespread oversight over motor vehicle dealerships. With 2024 being a presidential election year, the oversight will not cease because the regulatory zealots need to complete their Wishlist before November.
Dealers have always persevered to overcome adversity, and 2024 will not be any different. Here are twenty-four issues to which you should give attention in 24.
Federal and State Compliance
Dealers have become accustomed to federal oversight from any one of the numerous alphabet agencies, but in 2023, the Federal Trade Commission’s desire to micromanage and cripple dealers’ legitimate business efforts came to fruition. While dealers strive to avoid private lawsuits, compliance with state and federal laws will drastically change how dealers do business in 2024.
From advertising to sales practices to personnel treatment, a dealer must have in place a strong compliance program to operate in this regulatory climate.
- Combating Auto Retail Scams (CARS) Trade Regulation Rule. On December 12, 2023, the FTC issued the CARS Trade Regulation Rule, which was originally set to go into effect on July 30, 2024, but the FTC has since stayed that effective date. This Rule essentially micromanages car dealers. Many of the Rule’s requirements will vastly change how you do business, how you will advertise vehicles, what your forms should look like, the disclosures (orally and in writing) that you will have to provide to the customer and will have to do so on repeat, and the length of time it will take for a consumer to now purchase an automobile. The National Auto Dealers Association and the Texas Auto Dealers Association, filed a Petition for Review of the Review and a Motion to Stay the Rule in the United States Court of Appeals for the Fifth Circuit. The NADA and TADA requested that the court vacate or modify the Rule and stay its enforcement until pending resolution of the case. NADA and TADA have argued that the FTC failed to follow proper federal procedure to give adequate notice of the Rule to the public and in issuing the Rule, failed to do an adequate cost analysis to demonstrate a justifying need for the Rule, and failed to identify a rational connection to the evidence for the Rule prior to issuing it in December. The FTC stayed the effective date of the Rule on January 18, 2024 pending resolution of the court matter. Resolution of the Court proceeding will determine if the Rule is revoked or modified by Court order or if the Court finds in favor of the FTC, the Rule will presumably go into effect some time in later 2024. However, without a final determination by the court revoking the Rule, dealers must not sit idly by but should review their sales practices to ensure they are ready with best practices that comply with the Rule should it proceed, and if they are unsure, consult dealer counsel.
- Advertising. Whenever the FTC concentrates on dealer activities, a primary focus is advertising. Much of the CARS Trade Regulation Rule focuses on advertising. Although there are some gray areas with the CARS Rule because of lack of guidance by the FTC in the Rule, the advertising requirements provided for in the Truth in Lending Act and the Consumer Leasing Act are black and white. If you use a trigger term, you must make follow on disclosures. If you do not, the FTC has you on a clear-cut violation and it can compel you to stop activities it labels unfair and deceptive that are less clear cut in FTC consent orders. The FTC expects advertised prices and offers to be available to all unless limitations are clearly and conspicuously disclosed. If limitations make a price or offer unavailable to all, the advertisement must clearly and meaningfully disclose the terms customers must meet to obtain the advertised benefits. The CARS Rule offers a few new elements to these cornerstone requirements by an expanding the definition of “clear and conspicuous”, which includes that the disclosure be unavoidable, and requiring that the advertisement include the “offering price”, which is the total cash price that you will sell or finance the vehicle only excluding required government charges. Thus, if you charge a processing fee, which is permissible under Virginia law, your advertised “offering price” must now include the processing fee you charge and disclose that the charge is voluntary and not required by state law. The CARS Rule requires that you keep all advertisements for 24 months. Almost every FTC consent order involving a dealer has an advertising element to it. Make sure your managers in charge of advertising and your ad agencies understand the law.
- Selling Practices. Closely related to advertising compliance are selling practices. If you advertise a price, which must be the “Offering Price” as of July 30, 2024, be prepared to sell the vehicle at that price. Additional products and services, like extended service agreements and GAP protection, may be added to that but they must be disclosed as additions to price. Those products also must be expressly agreed to with clear disclosures that the products are voluntary to be compliant with the CARS Rule by July 30, 2024. Advertising a vehicle at a price at which the dealer does not intend to sell it is viewed by the agency as bait and switch – a cardinal sin. Bait and switch cannot be solved with a disclaimer that admits that you will not sell vehicles for the advertised Proper disclosures explain an advertised term and not negate it. A statement that you will not honor the advertised price in the advertisement will be seen as an admission of a violation. Another cardinal sin, and one on the FTC’s radar, is requiring the customer to finance the vehicle or purchase a product to get the price advertised for the vehicle. You cannot require the customer to buy gap for the price you state you will sell them the vehicle.
- Add-Ons. The FTC‘s views of add-ons differs greatly from dealers and even customers. To the FTC, price of the vehicle is the only thing that matters. Anything else and the FTC is quick to characterize it as a “junk fee”. The FTC’s view is incorrect and voluntary protection products, like extended service agreements and GAP protection, are important to many consumers. Moreover, charges for voluntary protection policies are not fees. However, dealers must be careful about other types of “creative” fees. Virginia law permits a dealer to charge the processing fee and a pass through of electronic titling fees. Other fees are not permitted. The most clear examples are commission fees or used car reconditioning fees added to the advertised price of a used vehicle. Those fees cannot be disclosed separate from the price of a vehicle. Charging any fees not expressly permitted by Virginia law in addition to the advertised price is considered a bait and switch practice by the FTC and violates Virginia law. As of July 30, 2024, all fees not required by the government, such as the processing fee and the 3rd party electronic titling fees, must be included in the “offering price” of a vehicle.
- Use a Fair Credit Policy. Credit discrimination is high on the enforcement list of the FTC. The fairness of pricing vehicle financing has been criticized for years. To deal with the criticisms, the NADA has developed a template program for fair credit. It requires a dealer to establish a standard starting point above buy rate for all customers, with downward deviations for non-discriminatory factors. If you have not adopted a policy, or if you adopted one and you no longer police it carefully, it is time to energize your fair credit compliance efforts. Adopt a policy and enforce it. Compliance with the policy is of utmost importance based on the recent consent orders by the FTC.
- Establish a policy for sale of VPPs. Discrimination in the sale of voluntary protection products is also high on the enforcement list of the FTC. Like criticisms over the terms of credit, proponents of stronger regulation of dealer practices have criticized VPP sales practices. To address the criticisms, NADA, along with the NAMAD and AIADA, developed a template program for sale of voluntary protection products. Use the NADA/NAMAD/AIADA program to protect against charges of discrimination in sale of VPPs. Adopt a policy and enforce it. The FTC already views VPPs as “junk fees,” thus having a standard policy and enforcing it is necessary.
- Credit Reports. High on the compliance list of the FTC is protection of consumers’ identity information, and an important aspect of that is protection of their credit reports. The law does not necessarily require that a business can access a credit report only with consumer written However, best practice is to obtain written consent because it eliminates the question of whether the dealer had a proper reason for accessing the customer’s report. Always have a customer provide written authorization to access a credit report. If your customer is at the dealership, get a signed consent. If the customer is remote, have access authorized through the dealership’s secure Internet portal.
- Be sure deals are neat and complete. You have a form package for a transaction with a consumer for a reason. The forms are required by state or federal law, or by best practice to protect your dealership. The forms do not work unless they are used properly. Be sure personnel finalizing transactions understand the need for all documents to be completed. Use a deal completion checklist. Periodically audit deals to be sure that all forms are being completed. Make sure your forms are up to date to address current laws. In 2024, it be critical for dealers to review their forms to comply with the disclosure requirements of the CARS Rule. You should seek legal advice on the disclosure requirements and form review.
2023 taught us that Franchisors are getting bolder with their demands on dealers, often openly disregarding state franchise law. For this reason, dealers must support their federal and state dealer trade associations as they work to protect dealer rights from the newest onslaughts. There is power in numbers and these trade associations aggregate resources to best represent dealer interests.
There are several issues critical to your prosperity as a franchisee in 2024.
- Support Your State Association. With a national election in 2024, the polarization of political views will be at an all-time high. The Virginia Automobile Dealers Association (VADA) is your advocate in Virginia and the association works hard to ensure friends on both sides of the aisle regardless of political divides. The VADA protect dealers against negative legislation that challenges franchise and licensing laws. The VADA introduces legislation and lobbies on your behalf to improve dealer franchise protections by educating Virginia elected officials on your business so they can understand the need for those protections. For these reasons, you need to support your state association, financially and through personal activism by getting to know your local representatives.
- The agency model. In 2023, the VADA effectively lobbied the General Assembly to pass an anti-agency bill to protect the franchise system. Though the bill does not use the word “agency” in the text, it essentially prohibits the manufacturer to market the vehicles, negotiate the terms of sale with buyers, negotiate terms of financing or leasing and sales of vehicle protection products, and then ship the designated vehicle to the dealer for delivery as the OEM’s agent for a set commission. Despite Virginia’s strong franchise protections, it does not mean that the manufacturers will not attempt to sprinkle agency model attributes through incentive payments or programs.
- Circumventing Anti-Agency Bills. In November 2023, at the LA Auto Show, Hyundai dropped a bomb and announced that Hyundai motor dealers will be able to sell their vehicles on Amazon due to a partnership between Hyundai and Amazon. The program is currently in a pilot phase, which began in January, with a handful of dealers working with Amazon to fine tune the process. However, there are many questions that surround the logistics of the program that have been unanswered such as trades? Is Hyundai circumventing anti-agency bills by selling through Amazon? How does this effect the dealers? In 2024, other manufacturers will follow in Hyundai’s footsteps. Monitoring the Amazon and manufacturer relationship will be critical to make certain your rights are protected as a franchise dealer.
- Be prepared to enforce your franchise rights. Virginia’s franchise act protections are not self-enforcing. OEMs continually have documents or programs that may disregard or violate Virginia law. OEMs have taken certain liberties over the years as to what franchise laws they want to follow and which they do not. If you are not enforcing your rights, the manufacturer will take advantage. Virginia has protections for fair payments for performing warranty repairs. You may have to enforce your right to entitled reimbursement at retail for labor and parts. If manufacturers do not want to allocate BEVs to you because you will not enter into their separate BEV contractual obligations, you may have to enforce the franchise law that gives you the right to sell all of the vehicles of the line make for which you are franchised. You may have to enforce your right to incentive monies for each new program that the manufacturer introduces, even though you do not upgrade your facility to each of the program’s requirements because you renovated your facility within the last 10 years. We all know that manufacturer programs are constantly changing. Failing to enforce your rights on the facility upgrade programs could mean you are leaving hundreds to thousands of dollars per vehicle on the table and encouraging the manufacturer to continue to skirt franchise laws.
- Performance Threats. OEMs continue their standard threats about dealer performance, particularly sales. What is especially upsetting for dealers is that the manufacturers are using sales during covid or when dealers were not being supplied vehicles to justify these critiques in performance. If you get a letter critical of your performance, answer it. Explain why your performance is not deficient. Be clear about the negative impact of inventory shortages. Explain why the standard you must meet is improper, for example your PMA is incorrectly defined making you responsible for sales in geographic areas where you have no advantage. NEVER agree that you have breached your dealer agreement.
- Question every document you are asked to sign. When your OEM rep presents you with a document to be signed, understand what it requires. Programs that cost you more and make you less will result as OEMs seek to make dealer income their own. Some OEM documents may violate Virginia law if they have waivers of the Virginia franchise act protections. Remember, your franchise agreement does not terminate. During renewal of the agreement, you cannot change a manufacturer’s form agreement, but the specific terms applicable to your dealership are negotiable. If the terms are unfavorable, raise the issues with the factory and negotiate more favorable terms as part of your renewal. If your factory representative labels you as a difficult dealer, point out the factory is changing the relationship, not you.
- Buy-Sells. While the multiples on dealership buy-sells have increased, so have the demands by the franchisors for certain things during the buy-sells. More often than ever, the franchisors have used these buy-sells to demand new facilities or facility upgrades from the buying dealers that would be otherwise illegal to ask of the seller. Franchisors have made the approval of the buy-sell contingent upon what the buying dealer is willing to do to get the franchise (i.e., de-dual, build more service bays, upgrade the facilities that was just upgraded 5 years previously). Whatever the contingency is, often it results in an increased cost for the buyer, not contracted for, and could lead to new negotiations between the parties. Selling dealers need to be upfront with buyers about what the franchisor has demanded of the past from the franchise. It’s best to know some of the issues that may come up with the manufacturer prior to entering into the contract. Virginia has a buyer standing statute that prohibits manufacturers for imposing a condition on the buyer that it cannot on the seller. Sellers and buyers need to know their rights under Virginia franchise law so that they can push back on some of the manufacturer demands.
- Succession and Dealer Ownership. If you do not have a succession plan, expect pressure from your franchisor to develop one. They want to know who will run the store (and most important communicate with them and buy OEM products) in the event a dealer passes. They want to avoid the embarrassment of a fight over control. As part of your planning, are you allowing family or long-term employees to buy interests in your company? If so, make sure you have the approval of your franchisor before you finalize the sale of or gift of stock. Many dealers think that they only must notify franchisors of minority interest changes after they make them. That is not the case. Most dealer sales and service agreements require manufacturer approval before a new interest in the company is granted. Any small interest gifted or sold requires manufacturer approval. If you choose to move your ownership interest into a trust for estate planning purposes that change must be approved by the manufacturer. Failing to obtain approval beforehand can be considered a breach of the dealer sales and service agreement.
While most dealers are concerned with the FTC and its regulation of its business, the other alphabet government agencies that oversee personnel matters also have oversight of how you operate. Be sure your personnel policies comply with the law and that you are enforcing your policies.
- FLSA Compliance. The federal Department of Labor will continue its vigilance on compliance with the Fair Labor Standards A All employees must earn minimum wage for each hour worked, and hours worked must be measured accurately. Employees eligible for premium overtime must be paid time and a half for each hour of overtime work. It is expected in 2024 that the DOL will issue a final rule raising the annual salary threshold from $35,568 to $55,068 for employees, who are exempt from overtime pay due to administrative, executive, professional, and outside sales professional exemptions pursuant to the FLSA. This means that for employees to be exempt from overtime pay for the administrative, executive, professional, and outside sales professional exemptions, the employee needs to earn no less than $55,068 a year, which equates to approximately $1,059 per week. The DOL will consider workers to be employees with FLSA rights, with classification of workers as independent contractors being the exception rather than the rule.
- Independent Contractor Rule. The federal Department of Labor issued its final independent contractor rule on January 10, 2024, which takes effect on March 11, 2024. This new Rule effectively returns to the Obama era independent contractor rule and rescinds the rule issued in 2021. The new Rule has a 6-factor analysis to determine if a worker is an employee or an independent contractor under the FLSA: (1) any opportunity for profit or loss a worker might have; (2) the financial stake and nature of any resources a worker has invested in the work; (3) the degree of permanence of the work relationship; (4) the degree of control an employer has over the person’s work; (5) whether the work the person does is essential to the employer’s business; and (6) a factor regarding the worker’s skill and initiative. If you have a worker at your dealership that is economically dependent on you for work, that person is an employee and not an independent contractor under this Rule. Persons who qualified as independent workers for the last few years may not qualify under the new Rule and may be considered an employee.
- Joint Employer Rule. The National Labor Relations Board’s ("NLRB") joint-employer rule went into effect on December 26, 2023. Entities are considered joint-employers of employees if 1) each entity has an employment relationship with the employees and 2) each entity shares or codetermines one or more of the employees' essential terms and conditions of employment. Essential terms and conditions of employment are defined as: (i) wages, benefits, and other compensation, (ii) hours of work and scheduling, (iii) the assignment of duties to be performed, the supervision of performance of those duties, (iv) issuing work rules and directions governing the manner, means, and methods of the performance of duties and the grounds for discipline, (v) the tenure of employment, including hiring and termination, and (vi) working conditions related to the safety and health of employees. If your dealer group operates under a common management company, the dealer management company should not directly be involved in codetermining many of the employees' essential terms and conditions of employment such as wages, benefits, and other compensation, hirings and terminations, working conditions related to the safety and health of employees, and issuing work rules, policies and procedures.
- Severance Agreements. With the National Labor Relations Board’s 2023 McLaren Macomb, et al., Case 07-CA-263041, severance agreements that contain overly broad non-disparagement and confidentiality clauses that potentially interfere with employees’ exercise of their Section 7 rights under the National Labor Relations Act violate the Act. Severance agreements with narrowly tailored confidentiality and non-disparagement provisions are allowable provided they do not “have a chilling effect that precludes employees from assisting others about workplace issues and/or communicating with the [Board], a union, legal forums, the media or other third parties are unlawful.” For confidentiality requirements, provisions that “restrict the dissemination of proprietary or trade secrets for a period of time based on legitimate business justifications” may still be lawful. For non-disparagement requirements, a provision that is “limited to employee statements about the employer that meet the definition of defamation… may be found lawful.” Drafting severance agreements should be left to knowledgeable counsel who understand the NLRB and the NLRA.
- Non-competition and Arbitration Agreements. The attack on employee non-competition agreements will continue. Virginia has enacted legislation to regulate non-competition agreements by eliminating them for those in lower wage positions. In 2024, it is expected that the FTC will issue a final rule to prohibit employers from entering into, attempting to enter into, or maintaining non-compete clauses with their employees. Your dealership should consider non-solicitation of employees and customers (depending on state law) and confidentiality agreements (which are compliant with the NLRB and NLRA). Businesses are also prevented from requiring an employee with a sexual harassment dispute or sexual assault dispute from having to engage in arbitration because of a pre-dispute agreement. Review your arbitration agreements. There should be an exception for subjects exempt from arbitration.
- I-9 Audits and Virginia law on Illegal Immigrants. Audits of Form I-9 compliance have increased over the years so it’s imperative to protect your business from adverse audit results. Dealers must follow the correct processes for completion of Forms I-9. Failing to give the employee the choice of documents to show identity and authorization to work can be the basis for a government enforcement action. Maintain Forms I-9 for the required time: for separated workers, one year after termination and three years after hire, whichever is longer. Spot check periodically to make sure you have a Form I-9 for every If not, follow up and have forms completed. Keep a note with each form completed after the required date to explain when and why the form was created. Spot check new forms periodically. If there are errors, have a procedure to correct them. Employers can only correct Section 2 and the supplement B of the form while employees must correct Section 1. Be sure the corrections are evident to avoid claims of wrongdoing. In addition to I-9 audits, Virginia law makes it unlawful and constitutes a Class 1 misdemeanor for any employer or agent of an employer to "knowingly employ, continue to employ, or refer for employment any alien who cannot provide documents indicating that he or she is legally eligible for employment in the United States." Under Virginia law, if a worker has a permit issued by the United States Department of Justice authorizing them to work in the United States, that permit shall constitute proof of eligibility for employment.
- CRM and Supplier Agreements. The largest monthly supplier cost for the general office is likely to be your computer or dealer management system (DMS). When contracting for a DMS, use expert advice. Have a detailed list of requirements and make sure the list is fulfilled. Think about how you may have to terminate your obligations and negotiate termination provisions for events like loss of a franchise or sale of a dealership. In addition to your DMS provider, you want favorable terms in all your supplier agreements and do not want to get stuck with unnecessary, long-term supplier contracts that could have large termination costs for events like loss of a franchise or sale of a dealership.
- Have a policy for review, approval, and execution of supplier contracts.
- For each contract, a dealer must ask why a lengthy term is required, and whether there is a benefit to the dealer.
- Do not agree to lengthy contract terms unless there is a reason that benefits you.
- Do not agree to automatic rollovers at the end to the term, except for month-to-month.
- Make sure the state in which your dealership operates is the choice of law and venue for any actions between you and the supplier
- EV Tax Credits. As announced in 2023, Dealer who sell “clean vehicles” need to register the dealership with the IRS for submissions of Time of Sale Reporting and any transfer EV tax credits that eligible buyers wish to use for towards the purchase of the vehicle. Both the vehicle and the consumer must qualify to be eligible for the tax credit. Eligible vehicles can be found at https://fueleconomy.gov/feg/tax2023.shtml. Consumers who have a modified adjusted gross income from the year they take delivery of the vehicle or the year before that, and is below the income threshold may claim the credit. Dealers need not verify income requirements. Dealer registration on the IRS portal began back in December 2023, and as expected, implementation has not smooth. Due to the numerous issues that have occurred on the portal, the IRS has announced extensions of varying deadlines. For those vehicles sold from January 1-16, 2024, which should have been able to be reported on the portal had it worked property, dealers have until January 19th to file those time of sale reports. However, even though the IRS has given the dealers an extension, the portal requires a “Buyer Attestation”. Such attestation requires that the buyer actually attest to questions and electronically sign on the portal, which is a logistics issue for the dealership (not everyone has access to the dealership’s portal) and a complete inconvenience for the consumer if the consumer has to return to the dealer to execute the attestation. Additionally, there have been privacy concerns with the portal, which has resulted in the IRS extending the deadline for dealers to submit the time of sale reports for all vehicles delivered in the 2023 calendar year. Per the law, dealers were supposed to have submitted the 2023 delivered vehicles time of sale reports by January 15, 2024. However, that deadline has been extended until January 31, 2024. 2023 time of sale vehicle reports should be submitted to Clean.Vehicles.Seller.Reporting@IRS.gov. For those who wish to have IRS guidance and ask questions, the IRS is offering office hours that the dealer may register to attend online.