United States: U.S. Supreme Court Holds Federal Agencies Can Issue New Interpretations Without Engaging In The Formal Rulemaking Process

The U.S. Supreme Court ruled unanimously on March 9, 2015, that a federal agency is not required to partake in the formal rulemaking process, which consists of providing public notice and an opportunity for comment, when it "wishes to issue a new interpretation of a regulation that deviates significantly from one the agency has previously adopted."

The Case

The issue in the underlying two cases, Perez v. Mortgage Bankers Association and its companion case, Nickols v. Mortgage Bankers Association, began when the U.S. Department of Labor (the Department) issued an opinion letter changing its stance on whether mortgage-loan officers fell within the Fair Labor Standards Act's (FLSA) administrative exemption.

In 1991 and again in 2001, the Department's Wage and Hour Division issued opinion letters finding that mortgage-loan officers did not qualify for the administrative exemption, and therefore, they were not exempt from the minimum wage and overtime requirements of the FLSA. In 2004, the Department, through a notice-and-comment rulemaking procedure, promulgated its current regulations, which contained a new section providing examples of exempt administrative employees. In response to a request by Mortgage Bankers Association (MBA), the Department issued a new opinion in 2006 interpreting the revised regulations, wherein it found that mortgage-loan officers fell within the administrative exemption under the new 2004 regulations. However, four years later, the Wage and Hour Division changed its opinion again and concluded in the Department's 2010 Administrator's Interpretation that mortgage-loan officers "have a primary duty of making sales for their employers, and, therefore, do not qualify" for the administrative exemption. The 2010 Administrator's Interpretation was issued without notice or an opportunity for comment.

MBA filed a complaint in federal district court challenging the 2010 Interpretation, contending that it was inconsistent with the 2004 regulation and was procedurally invalid in light of the D.C. Circuit Court's decision in Paralyzed Veterans, 117 F. 3d 579. Under what is referred to as the "Paralyzed Veterans doctrine," if "an agency has given its regulation a definitive interpretation, and later significantly revises that interpretation, the agency has in effect amended its rule" and thus is required to engage in the notice-and-comment rulemaking procedure set forth in the Administrative Procedure Act (APA). The D.C. Circuit Court reversed the lower court's ruling in favor of the Department and held that the 2010 Interpretation had to be vacated because the Department did not engage in the notice-and-comment process.

The Supreme Court's Decision

In an opinion authored by Justice Sonia Sotomayor, the Supreme Court reversed the D.C. Circuit Court's decision and held that the "Paralyzed Veterans doctrine" is contrary to the "text of the APA's rulemaking provisions, and it improperly imposes on agencies an obligation beyond the 'maximum procedural requirements' specified in the APA." Justice Sotomayor quotes the text of the APA, pointing out that the APA's notice-and-comment requirement specifically does not apply to interpretive rules. This exemption of interpretive rules from the notice-and-comment process, Justice Sotomayor states, "is fatal to the rule announced in Paralyzed Veterans."

Justice Sotomayor explains that while the D.C. Court was correct that the APA mandates that agencies use the same procedures when they amend or repeal a substantive rule as they used to issue the rule in the first instance, the D.C. Court incorrectly applied the same reasoning to the interpretation of rules. Ultimately, Justice Sotomayor held that "because an agency is not required to use notice-and-comment procedures to issue an initial interpretive rule, it is also not required to use those procedures to amend or repeal that [interpretive] rule."

In rejecting MBA's defense of the "Paralyzed Veterans doctrine," Justice Sotomayor held that it is possible for an agency to "interpret" a regulation without "'effectively amending' the underlying source of law." Further, Justice Sotomayor emphasized the longstanding notion that interpretive rules "do not have the force and effect of law."

Notably, the Supreme Court did not address whether or not the Department's most recent interpretation regarding mortgage-loan officers' falling outside of the administrative exemption was well reasoned or valid. Instead, the majority opinion quoted prior precedent and highlighted that the APA still requires an agency to "provide more substantial justification when 'its new policy rests upon factual findings that contradict those which underlay its prior policy; or when its prior policy has engendered serious reliance interests that must be taken into account,' noting that it "would be arbitrary and capricious to ignore such matters."

What This Means for Employers

While the unanimous Supreme Court decision may appear on its face to most immediately remove mortgage-loan officers from the administrative exemption, this is not necessarily the case. The validity of the Department's interpretation was not before the court and because of the drastic change in the Department's opinion, an "arbitrary and capricious" argument opposing the interpretation may be viable in future litigation. Furthermore, even if mortgage-loan officers are not found to be exempt under the administrative exemption, this does not preclude a finding that they are exempt under other circumstances. Most notably, recent district court decisions have held certain mortgage-loan officers as exempt under the outside salesperson exemption. It is important to note that the exempt or non-exempt status of any particular employee depends on the salary and duties performed by that employee. An employee's job title alone is not enough to determine whether the employee will fall into the exempt or non-exempt category.

More broadly, however, the Supreme Court's ruling provides federal agencies with the ability to significantly alter their interpretations of rules without notice to the public and without providing the public with an opportunity for comment. Therefore, it may be prudent for employers to closely monitor changes to these agency interpretations.

If you have any questions about this Alert, please contact any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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