Chicago Business Litigation Lawyer Blog
The warranty rate has been the same for so long that nobody in the store questions it anymore. The service department books warranty labor at a number the factory set years ago, posts parts at the manufacturer’s cost-plus formula, and moves on to the next repair order. Customer-pay work runs at the dealer’s real retail rate, the one the market actually supports, and warranty work runs at something lower because that is simply how it has always been done. Across a busy fixed-operations department, the gap between those two numbers, repeated over thousands of repair orders a year, is not a rounding error. It is a six-figure subsidy the dealer is handing the manufacturer without realizing it.
Illinois law does not require dealers to provide that subsidy. The Illinois Motor Vehicle Franchise Act, at 815 ILCS 710/6, says the opposite. It requires manufacturers to compensate dealers for warranty parts and labor at the dealer’s retail rate, gives the dealer a defined process to establish that rate, and forbids the factory from clawing the increase back through surcharges. Most dealers have the right. Far fewer have exercised it. The store that understands the statute can convert a long-running giveaway into recurring gross profit, and the conversion is built into the law.
Start with the rule itself, because it is broader than most service managers assume. Section 6 provides that adequate and fair compensation requires the manufacturer to pay each dealer no less than the amount the retail customer pays for the same services, with regard to both rate and time. That single sentence covers two distinct fights, the labor rate and the labor time, and it ties both to what real customers actually pay rather than to what the factory prefers. The statute reinforces the point at the back end by adding that in no event shall compensation for labor times and labor rates be less than the rates the dealer charges retail customers for like nonwarranty service.
On labor, the statute is specific about how the rate is set. The manufacturer must pay the dealer the same effective labor rate the dealer earns on customer-pay work, calculated from 100 sequential repair orders chosen and submitted by the dealer, less simple maintenance repair orders. Excluding routine maintenance from the sample matters, because oil changes and tire rotations drag the effective rate down, and the law lets the dealer leave them out. The statute also closes the usual factory escape hatches. It requires full compensation for diagnostic work, and it requires that time allowances for warranty work be no less than what is charged to retail customers for the same work. Where no time guide has been agreed for a warranty repair, the manufacturer’s time guide applies multiplied by 1.5. And if a technician has to call a technical assistance center, engineering, or another manufacturer source to complete a warranty repair, the manufacturer must pay for that time, including time on hold.
On parts, the statute defines the markup the dealer is owed and the method to prove it. The dealer is entitled to the prevailing retail price it charges for the same parts, which the Act defines as the dealer’s cost, including shipping, multiplied by one plus the dealer’s average percentage markup. To establish that markup, the dealer submits 100 sequential customer-paid repair orders, or 90 days of customer-paid repair orders, whichever is less, covering repairs made within the prior 180 days, and declares the average percentage markup. The declared markup takes effect 30 days later, subject to the manufacturer’s right to audit the submitted orders within those 30 days and adjust based on the audit. Only retail sales count toward the calculation, not warranty work or routine maintenance parts, and the manufacturer cannot force the dealer into an unduly burdensome part-by-part methodology. There are limits on frequency. A dealer may request a warranty labor rate increase once per calendar year and may seek to change the parts markup no more than twice per calendar year.
The statute also protects the increase once the dealer earns it. Manufacturers are not permitted to impose any cost-recovery fee or surcharge against the dealer for payments made under Section 6. That provision is the difference between a real rate increase and a shell game, because without it a factory could grant the higher warranty rate with one hand and take it back through a parity surcharge with the other. Illinois forecloses that move. The statute likewise bars reductions based on preestablished market norms or averages, and it prohibits manufacturers from limiting customer repair frequency through failure-rate indexes or national averages.
Two related protections are worth keeping in the same conversation, because they put money in the dealer’s pocket on the same ledger. When a manufacturer imposes a recall or stop sale on a new vehicle in the dealer’s inventory that prevents its sale, the Act requires the factory to compensate the dealer for interest and storage until the vehicle is repaired and made ready for sale. And on the audit side, the statute bars any debit reduction or chargeback of an item on a warranty repair order absent a finding of fraud or illegal conduct by the dealer, while limiting the factory’s audit window to one year from the date the claim was paid or the credit issued. A dealer pursuing a rate increase should expect a closer look at claims, and should know that the look has legal boundaries. Continue reading ›