Justices Consider Whether DOL Must Use Rulemaking to Change FLSA Interpretation

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By Jay-Anne Casuga

Dec. 1 — The Administrative Procedure Act expressly exempts federal agencies like the Labor Department from formal notice-and-comment rulemaking requirements when they make changes to interpretative rules, Deputy Solicitor General Edwin S. Kneedler argued Dec. 1 in consolidated cases before the U.S. Supreme Court.

Kneedler contended that the U.S. Court of Appeals for the District of Columbia Circuit's Paralyzed Veterans doctrine, which the appeals court used to vacate a 2010 administrator interpretation by the DOL's Wage and Hour Division regarding mortgage loan officers' nonexempt status under the Fair Labor Standards Act, “rests on a real misreading” of the APA.

The D.C. Circuit in July 2013 agreed with the Mortgage Bankers Association that a notice-and-comment period was required under the APA because the 2010 guidance was a “definitive” regulatory interpretation that significantly reversed the agency's previous stance, as expressed in a 2006 DOL opinion letter, that loan officers fall within the FLSA's administrative employee exemption.

The APA plainly states that an agency's amendment or repeal of an interpretative rule, as opposed to a substantive legislative rule, is exempt from formal rulemaking, Kneedler said. But under Paralyzed Veterans of America v. D.C. Arena, 117 F.3d 579, 6 AD Cases 1614 (D.C. Cir. 1997), he said, once an agency gives a “definitive interpretation of a rule, it cannot significantly modify that interpretation without going through notice-and-comment rulemaking.”

Allyson N. Ho of Morgan, Lewis & Bockius in Washington, who represented the MBA, maintained that the D.C. Circuit correctly held that the DOL's 2010 interpretation was a “de facto amendment” of the agency's substantive rules and therefore required formal rulemaking.

Conflict Between 2006 Letter, 2010 Interpretation

The DOL in 2006 issued an opinion letter in response to questions submitted to the agency by the MBA, a national trade association representing more than 2,200 firms in the real estate finance industry that employ more than 280,000 people.

MBA inquired about the FLSA exemption status of loan officers who spent less than 50 percent of their working time on “customer-specific persuasive sales activity.”

In the opinion letter, the agency said the duties and responsibilities of the mortgage loan officers qualified them as administrative employees exempt from the FLSA's minimum wage and overtime protections.

Four years later in 2010, the agency released an administrator's interpretation that “explicitly withdrew” the 2006 letter and declared that workers who perform the “typical job duties” of a mortgage loan officer “do not qualify as bona fide administrative employees” under the FLSA and its implementing regulations.

The MBA challenged the 2010 interpretation, but the U.S. District Court for the District of Columbia in June 2012 denied summary judgment to the association.

The D.C. Circuit reversed in July 2013, and the Supreme Court agreed in June 2014 to review the case.

Questions Regarding Deference

Kneedler argued that “it is of critical importance for agencies to be able to issue interpretive rules,” and the legislative history of the APA shows that Congress didn't want to impose obstacles to interpretations, which allow the public to know the agency's stances.

Arguing on behalf of the Mortgage Bankers Association, Allyson N. Ho of Morgan, Lewis & Bockius said the DOL's 2010 interpretation was interpretive “in name only” and it was actually a substantive rule that required notice-and-comment rulemaking.

“One of the purposes of giving an agency the authority to interpret a statute and its regulations is to take into account evolving circumstances,” he said.

In the present case, Kneedler said, certain job descriptions may not have existed at the time the 2006 interpretation on mortgage loan officers was issued.

He added that the FLSA is one example of a law in which Congress “has actually contemplated that the agency would give interpretations and might change them,” as the DOL did in 2010 when it decided the earlier opinion letter was “unduly narrow” and “simply erroneous.”

Justice Sonia Sotomayor asked Kneedler if the 2006 letter was contrary to previous DOL interpretations. Kneedler responded that the agency in a 2001 opinion letter had stated that mortgage loan officers didn't fall within the FLSA's administrative exemption.

“So is it a second flip-flop?” Justice Antonin Scalia asked. “Maybe we shouldn't give deference to agency interpretations of its own regulations. That would solve … the problem of this case. For me it would be easy.”

Kneedler responded that the question of deference isn't before the court in the case.

‘End Run Around' Rulemaking?

Justice Elena Kagan observed that the case seems to be partially motivated by employer concerns that federal agencies are using interpretive rules and guidance documents as “an end run around the notice-and-comment provisions.”

She and Sotomayor both asked Kneedler what the remedy would be to allay that concern.

“One of the purposes of giving an agency the authority to interpret a statute and its regulations is to take into account evolving circumstances,” Deputy Solicitor General Edwin S. Kneedler said.

Kneedler replied that the DOL's interpretive rule “is by no means necessary to establish a basic of rule of liability” regarding the classification of employees as FLSA-exempt because the law itself supplies the “standard to which the regulated party could be held.”

Additionally, he said the Portal-to-Portal Act, which amended the FLSA, contains a safe-harbor provision stating that an employer can't be held liable for a good-faith reliance on an interpretation issued by the DOL.

Furthermore, he said the APA contains a mechanism that allows the regulated community to petition an agency for rulemaking. The denial of such a petition would be subject to judicial review, Kneedler said.

Scalia asked why there should be a difference between substantive and interpretive rules if the government wants courts to apply the same deference to both.

Kneedler said he believes that courts must ultimately decide the level of deference given to an agency's interpretation.

Kagan pointed to the high court's ruling in Christopher v. SmithKline Beecham Corp., 132 S. Ct. 2156, 19 WH Cases2d 257 (2012). In that case, she said, the court said judicial deference to the DOL's interpretations of its own regulations under Auer v. Robbins, 519 U.S. 452, 3 WH Cases 2d 1249 (1997), wouldn't apply “if the interpretation has been unstable over time and if the interpretation has created a kind of unfair surprise for private parties.”

Kneedler said he doesn't believe Christopher is “dispositive on that point” and that a change in an agency's position shouldn't alter the degree of judicial deference going forward.

Justices Discuss Interpretation ‘Conundrum.'

Ho argued on behalf of the MBA that the DOL's 2010 interpretation was interpretive “in name only” and that it was actually a substantive rule that required notice-and-comment rulemaking.

Both Kagan and Justice Ruth Bader Ginsburg pointed to a “conundrum” in the case: If the MBA contends that the 2010 interpretation is subject to formal rulemaking, then why shouldn't the 2006 interpretation, which the association favors, also be subject to a notice-and-comment period?

Ho replied that the status of the 2006 opinion letter as a legislative or interpretative rule isn't before the court.

But she added that under Paralyzed Veterans, the first interpretation “has to be authoritative” and “not all interpretations are authoritative.”

The first interpretation has to invite “reliance upon it” such that if the agency does “a 180” or takes a “logically inconsistent position with it at point B,” then Paralyzed Veterans applies, Ho said.

Here, she said, the government conceded that the 2006 letter was the DOL's “authoritative, definitive interpretation” on mortgage loan bankers, and the D.C. Circuit concluded that the 2010 interpretation was a de facto substantive amendment.

Justice Anthony Kennedy, however, pointed out that in order for the MBA to make its case, the second interpretation deserves the same Auer deference as the first. “You are basically running away from Paralyzed Veterans,” he said.

Chief Justice John Roberts posited that it “may not be a bad idea to run away from Paralyzed Veterans.”

Scalia asked Ho if the question presented in the case boils down to whether an “interpretative rule that radically modifies a prior interpretative rule is a substantive rule.”

Ho answered in the affirmative. “We believe that is an accurate statement of what the D.C. Circuit has, in fact, been doing in its Paralyzed Veterans doctrine,” she said.

To contact the reporter on this story: Jay-Anne B. Casuga in Washington at jcasuga@bna.com

To contact the editor responsible for this story: Susan J. McGolrick at smcgolrick@bna.com