No Deference for DOL Overtime Rule on Car Workers, Justices Rule

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By Kevin McGowan

June 20 — Service advisers at car dealerships may be ineligible for overtime pay because they might fall within a Fair Labor Standards Act exemption, the U.S. Supreme Court ruled 6-2, rejecting a Labor Department rule ( Encino Motorcars, LLC v. Navarro, 2016 BL 196078, U.S., No. 15-415, 6/20/16 ).

The court June 20 reversed a U.S. Court of Appeals for the Ninth Circuit decision that service advisers for Encino Motorcars LLC fall outside an FLSA exemption covering car salesmen, mechanics and partsmen.

The Ninth Circuit had deferred to a 2011 DOL final rule interpreting the exemption not to include the service advisers because they neither sell nor service automobiles, thus making them entitled to overtime pay.

But the Supreme Court said the DOL's 2011 interpretation—which the department issued after acquiescing for more than 30 years in decisions holding service advisers are FLSA-exempt and not entitled to overtime—isn't entitled to any judicial deference. Instead, the exemption codified at 29 U.S.C. § 213(b)(10)(A) could be interpreted to cover the service advisers who sell the dealership's maintenance and repair services, the court said.

No judicial deference is warranted if an agency regulation is “procedurally defective,” Justice Anthony Kennedy wrote for the court. A “basic procedural requirement” of rulemaking is that “an agency must give adequate reasons” for its decision to change existing policies, the court said.

“Applying those principles here, the unavoidable conclusion is that the 2011 regulation was issued without the reasoned explanation that was required in light of the Department's change in position and significant reliance interests involved,” Kennedy wrote. The Ninth Circuit therefore must decide the statutory issue without giving “controlling weight” to the DOL's rule, the court said.

In a dissent joined by Justice Samuel Alito, Justice Clarence Thomas said the Supreme Court should have resolved the FLSA issue itself and held the service advisers are exempt from overtime pay.

In a concurring opinion joined by Justice Sonia Sotomayor, Justice Ruth Bader Ginsburg said that “nothing in today's opinion disturbs well-settled law.”

Ruling Generally Seen as Limited

Lawyers representing employers applauded the court's ruling but differed regarding how broadly the decision could be read.

All eight justices agreed no deference was owed to the DOL’s 2011 rule because the agency failed to explain it in “any manner that could be described as adequate,” and the regulation therefore was arbitrary, said Scott Witlin, a partner with Barnes & Thornburg in Los Angeles.

The DOL recently has been trying to “rewrite” federal employment laws through “administrative fiat,” and the court's decision should give the department pause, Witlin told Bloomberg BNA in a June 20 e-mail.

This decision signals that courts reviewing those other regulations must “take a careful look at whether the DOL fulfilled its obligation to explain its reasoning when adopting new interpretations of decades-old laws,” Witlin said.

David R. Carpenter, a partner with Sidley Austin LLP in Los Angeles, said the decision provides an “interim victory” for Encino Motorcars and tells federal agencies that “conclusory” statements included in preambles to regulations won't trigger judicial deference.

But rather than change the principles outlined in Chevron U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984), the Supreme Court just confirms an agency must provide a “reasoned explanation” for changing its prior statutory interpretation to merit judicial deference, Carpenter told Bloomberg BNA June 20.

Like some other decisions issued by the court since Justice Antonin Scalia's death, this ruling has the feel of a compromise in which the justices agreed on relatively narrow grounds they all could endorse, Carpenter said.

The result is “a modest confirmation” of Chevron's tenet that no judicial deference is owed when an agency regulation is procedurally defective, Carpenter said.

The decision could even be read as somewhat favorable to the DOL and other agencies, said Mark Batten, a partner with Proskauer Rose in Boston.

The opinion's reach is “likely to be limited” because of the “particular facts presented,” he told Bloomberg BNA in a June 20 e-mail.

The court “specifically acknowledged” the DOL is “entitled to change its mind, so long as it explains itself,” Batten said. “It would seem to be a pretty simple matter” for a federal agency to “just issue a few paragraphs of rationale, which the DOL did not do here,” he said.

The decision in that sense is consistent with Perez v. Mortgage Bankers Ass'n, 135 S. Ct. 1199, 24 WH Cases2d 529 (U.S. 2015), in which the court unanimously upheld the DOL’s “flip-flop” on the exempt status of mortgage loan officers, Batten said.

“The consistent message seems to be that agencies can take whatever position they like, even if that upsets settled expectations from prior interpretations, so long as the agency articulates a basis for the change,” he said.

The decision “may come to stand for the notion that courts should defer to agency rulemaking so long as minimal procedural requirements are met,” Batten said. Although the DOL lost this one, he said, “the decision may signal that the agency’s views will win out in the future.”

But Catherine Ruckelshaus, general counsel and program director of the National Employment Law Project in New York, said it's “not that momentous” a decision. NELP filed an amicus brief backing the Encino service advisers.

The court is just saying that in this particular context, no Chevron deference applies, Ruckelshaus told Bloomberg BNA June 20.

The justices followed “long-standing” administrative law principles regarding agencies' statutory interpretations, Ruckelshaus said.

On remand, the Ninth Circuit still could decide that the FLSA permits what the department said in its regulation, she said.

The court's decision is “limited to the facts,” which include a “pretty tortured” procedural history of changing interpretations of the FLSA exemption, Ruckelshaus said.

Stephanos Bibas, a University of Pennsylvania law professor who represented the workers before the Supreme Court, declined to comment on the decision.

Paul D. Clement of Bancroft PLLC in Washington, who represented Encino Motorcars, didn't respond to Bloomberg BNA's request for comment.

DOL Explanation Held Wanting

The Supreme Court granted Encino Motorcars' petition for review on Jan. 15. During oral argument April 20, many of the justices expressed reservations about the DOL's process prior to its 2011 final rule as well as the adequacy of the department's explanation for changing its view of the automobile employee exemption.

In the majority opinion, Kennedy said an agency's obligation to show “a rational connection” between “the facts found and choices made” is satisfied when “the agency's explanation is clear enough that its ‘path may reasonably be discerned.' ”

“But where the agency has failed to provide even that minimal level of analysis, its action is arbitrary and capricious and so cannot carry the force of law,” the court said.

Agencies may change their existing policies “as long as they provide a reasoned explanation for the change,” Kennedy wrote.

But the DOL in 2011 “offered barely any explanation” for its change from the department's previous view that service advisers were covered by the exemption, the court decided.

The agency since the 1970s had acquiesced in court decisions holding that service advisers were covered by the FLSA exemption. The DOL memorialized that position in a 1987 field operations handbook, the court said. In proposing to change some FLSA interpretations in a 2008 proposed rule, the DOL hadn't indicated it intended to change its view on service advisers, the court said.

The 2011 final rule is inadequate because it doesn't explain why the DOL switched course, the court said.

“A summary discussion may suffice in other circumstances, but here—in particular because of decades of industry reliance on the department's prior policy—the explanation fell short of the agency's duty to explain why it deemed it necessary to overrule its previous position,” Kennedy wrote.

In dissent, Thomas said he agrees with the majority's conclusion that no judicial deference is owed to the DOL's “procedurally defective” 2011 regulation.

But the court should decide itself whether service advisers fall under the FLSA exemption rather than remand that issue to the Ninth Circuit, the dissent said.

“I disagree with its ultimate decision to punt on the issue before it,” Thomas wrote. “We have an ‘obligation … to decide the merits of the question presented.' ”

The statutory text “reveals that service advisors are salesmen primarily engaged in the selling of services for automobiles,” the dissent said. “Accordingly, I would reverse the Ninth Circuit's judgment.”

To contact the reporter on this story: Kevin McGowan in Washington at kmcgowan@bna.com

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