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Auto Dealerships: Employee Classification for Payroll (2026)
Employee classification in auto dealerships is two questions: whether salespeople and finance managers are employees or contractors, and whether the employees are exempt from overtime. BEG runs auto dealership payroll for $45 per employee per month inside the payroll software you already use, all-inclusive, live in 3 to 5 business days.
Employee or contractor: how auto dealerships get it wrong
For the 13(b)(10)(A) overtime exemption, a mechanic is an employee primarily engaged in mechanical work on vehicles; employees primarily doing nonmechanical work such as washing, cleaning, painting, polishing, tire changing or lubricating are not mechanics and are owed overtime. Primarily engaged means over 50 percent of the employee's time in the workweek.
DOL lists service writers, service advisors, service managers and service salesmen among the dealership employees covered by the section 13(b)(10)(A) overtime exemption. Managers and administrative employees may instead be exempt from minimum wage and overtime under section 13(a)(1) if they meet its tests.
Exempt or non-exempt
Section 13(b)(10)(A) of the FLSA exempts salesmen, partsmen and mechanics who are primarily engaged in selling or servicing automobiles, trucks or farm implements at a nonmanufacturing dealership from overtime pay, but not from minimum wage. The exemption applies regardless of the dealership's annual dollar volume of sales.
The salary floor for the executive, administrative and professional exemptions is $684 a week, restored to the 2019 level after the 2024 rule was vacated. Automotive service technicians and mechanics at the May 2025 national median of $50,620 a year clear that salary test, so the duties test decides.
What misclassification costs
Under IRC section 132(j)(3), qualified demonstration use of a dealership vehicle by a full-time automobile salesperson is a working condition fringe excluded from wages, so the dealer does not withhold income tax or pay FICA on that value. The full exclusion requires use within the dealer's sales area (safe harbor radius of 75 miles) and personal use outside working hours, less commuting, averaging no more than 10 miles per day.
Reclassifying a contractor as an employee means back FICA at 15.3 percent split between the parties, back FUTA, penalties and interest, and often back overtime under the FLSA at time and one half for two or three years.
The rules behind this page, with sources
General information, not legal advice. Every rule below was read on the agency page linked next to it.
- For the 13(b)(10)(A) overtime exemption, a mechanic is an employee primarily engaged in mechanical work on vehicles; employees primarily doing nonmechanical work such as washing, cleaning, painting, polishing, tire changing or lubricating are not mechanics and are owed overtime. Primarily engaged means over 50 percent of the employee's time in the workweek. [29 CFR 779.372]
- DOL lists service writers, service advisors, service managers and service salesmen among the dealership employees covered by the section 13(b)(10)(A) overtime exemption. Managers and administrative employees may instead be exempt from minimum wage and overtime under section 13(a)(1) if they meet its tests. [DOL Fact Sheet #11]
- Section 13(b)(10)(A) of the FLSA exempts salesmen, partsmen and mechanics who are primarily engaged in selling or servicing automobiles, trucks or farm implements at a nonmanufacturing dealership from overtime pay, but not from minimum wage. The exemption applies regardless of the dealership's annual dollar volume of sales. [29 CFR 779.372]
- Under IRC section 132(j)(3), qualified demonstration use of a dealership vehicle by a full-time automobile salesperson is a working condition fringe excluded from wages, so the dealer does not withhold income tax or pay FICA on that value. The full exclusion requires use within the dealer's sales area (safe harbor radius of 75 miles) and personal use outside working hours, less commuting, averaging no more than 10 miles per day. [IRS Rev. Proc. 2001-56]
Read the full guide to the employee versus contractor test, and the rest of the auto dealership payroll library.
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Frequently Asked Questions
Are salespeople in an auto dealership employees or contractors?
For the 13(b)(10)(A) overtime exemption, a mechanic is an employee primarily engaged in mechanical work on vehicles; employees primarily doing nonmechanical work such as washing, cleaning, painting, polishing, tire changing or lubricating are not mechanics and are owed overtime. Primarily engaged means over 50 percent of the employee's time in the workweek.
What does the second test look at?
DOL lists service writers, service advisors, service managers and service salesmen among the dealership employees covered by the section 13(b)(10)(A) overtime exemption. Managers and administrative employees may instead be exempt from minimum wage and overtime under section 13(a)(1) if they meet its tests.
Which auto dealership employees can be exempt from overtime?
Section 13(b)(10)(A) of the FLSA exempts salesmen, partsmen and mechanics who are primarily engaged in selling or servicing automobiles, trucks or farm implements at a nonmanufacturing dealership from overtime pay, but not from minimum wage. The exemption applies regardless of the dealership's annual dollar volume of sales.
What does managed payroll cost for an auto dealership?
$45 per employee per month, all-inclusive, inside the payroll software you already use, with no monthly minimum. Front-end and back-end commission structures, flat-rate tech pay and F&I chargebacks are configured at setup, not billed as add-ons.
Related Resources
Anthony leads payroll solutions at Business Executive Group, a national managed payroll firm serving businesses across industries including Auto Dealerships. BEG manages payroll at $45 PEPM, all-inclusive, with deep expertise in compliance, multi-state filing, and industry-specific payroll requirements. Get instant pricing at beghr.com.
Authoritative source: IRS: Independent Contractor or Employee
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