All fifty U.S. states now have provisions in their dealer franchise laws that require automotive manufacturers and/or distributors to reimburse car dealers at the same retail rates that the dealers charge to their customers for both parts and labor. Some of these laws have been on the books for over 15 years and, during this time, many dealers have exercised their rights to obtain retail rates for warranty parts and labor. However, we have seen widespread and ever-changing interpretations by the automotive manufacturers, which have limited the dealers from achieving full retail rates.
Additionally, we have observed that the states that were on the front end of this movement may not have as detailed language as the states that have passed similar laws in recent years. Some of these laws, such as the California AB-179, have precise language pertaining to the rights of the dealers. The most impactful of these provisions relate to the exclusions in the calculation.
Many states do not have as many exclusions as the California law and other recently passed laws, and as a result, certain manufacturers have included repairs to the detriment of the dealers, such as alignments, coolant flushes, tire rotations, safety checks, batteries, brakes, employee repairs, repairs caused by outside influence, repairs for governmental agencies, parts sold at wholesale and repairs covered by service contracts. We recommend the following exclusions that should be considered in any future versions of the law:
- Maintenance
- Manufacturer, manufacturer branch, distributor, or distributor branch or dealer-initiated special events, specials, or promotional discounts for retail customer repairs
- Parts or repairs sold at wholesale
- Alignments
- Repairs for vehicles owned by the dealership, an affiliate of the dealership or an employee of the dealership
- Repairs for which volume discounts are provided to groups such as governmental agencies and insurance companies
- Extended warranties or service contracts
- Repairs of conditions caused by collision, road hazard, forces of the elements, vandalism, theft, or owner, operational, or third-party negligence or deliberate act
- Accessories
- Batteries
- Tires and all tire-related repairs (including tire rotations)
- Vehicle reconditioning
Additionally, we have seen the following language in other state laws that can help protect the dealer’s rights and facilitate a swift approval process:
- Allow the dealer to submit a single set of repair orders for parts and labor or separate sets of repair orders for parts or labor.
- Include language that requires the franchisor to modify and not reject the submission so long as the calculation is not materially inaccurate or incomplete.
- Include language that requires the franchisor to apply the approved rates to all warranty work, including recalls, manufacturer goodwill and warranty extensions.
- Prohibit the manufacturer from adjusting the parts or labor rate by comparing it to other dealers in the market, region or state.
- Also, refrain from using the terms “reasonable or “unreasonable” at any point in the law. These terms have allowed certain manufacturers to take a liberal approach to such language and adjust the rate to the market.
- Prohibit the manufacturer from supplying a part at no cost, drop shipping a part or paying a handling charge for any warranty repairs.
- Prohibit the manufacturer or distributor from changing part numbers for parts associated with recalls and decreasing the dealer’s cost. The dealer cost for any part number involved in recalls should be no less than the part’s highest cost for one year preceding the announcement date of any recall.
- We have seen manufacturers reduce the dealer cost of parts used in recalls by 80% to 90%, which negates the dealers’ retail warranty reimbursement rate.
Finally, there has been movement in the automotive industry to address the constant reduction of warranty labor times by manufacturers. Most alarming are the reductions in engine and transmission repairs and recalls. Based on conversations with fixed operations directors, these labor times are not realistic for technicians to complete the repairs. As a result, certified A-level technicians often resist these jobs. States, such as, Illinois, Montana and Minnesota have passed legislation in recent years to allow dealers to use third party time guides for warranty work. While this is a good start, these laws do not provide a defined methodology to apply the third-party time guide, which could lead to manipulation and delays by the manufacturers. We recommend any potential language relating to this issue contain precisely defined language for the process to request and submit for third party time guide labor time application to warranty repairs.
These clauses will help dealers achieve true retail rates when submitting for warranty reimbursement increases. State Associations should review their current laws and look to add the language listed above to any new proposed amendments of their franchise laws.
Contact Us
For more information on this topic, contact Withum’s Dealership Services Team.
