Supreme Court 9-0 Says DOL Didn't Need Rulemaking to Change FLSA Interpretation

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By Jay-Anne Casuga

March 9 — 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, the U.S. Supreme Court unanimously held March 9.

Plaintiffs' and management attorneys told Bloomberg BNA that although the ruling clarifies federal agencies' authority to change their regulatory interpretations, it also recognizes lingering concerns related to the release of conflicting interpretations without notice and comment that may nevertheless bind regulated entities because courts generally must defer to the agencies under existing Supreme Court precedent.

Writing for the court, Justice Sonia Sotomayor found that the U.S. Court of Appeals for the District of Columbia Circuit's doctrine in Paralyzed Veterans of America v. D.C. Arena, 117 F.3d 579, 6 AD Cases 1614 (D.C. Cir. 1997)—which states that an agency cannot significantly modify a previously issued definitive interpretation of a rule without public notice and comment—is “contrary to the clear text of the APA's rulemaking provisions.”

The D.C. Circuit in July 2013 relied on its Paralyzed Veterans doctrine to vacate a 2010 administrator interpretation by the DOL's Wage and Hour Division regarding the status of mortgage loan officers under the Fair Labor Standards Act.

Reversing the D.C. Circuit, Sotomayor said the APA's “categorical exemption of interpretive rules from the notice-and-comment process is fatal to the Paralyzed Veterans doctrine,” which “improperly imposes on agencies an obligation beyond the APA's maximum procedural requirements.”

Chief Justice John G. Roberts and Justices Anthony M. Kennedy, Ruth Bader Ginsburg, Stephen Breyer and Elena Kagan joined in the opinion. Justices Samuel A. Alito, Antonin Scalia and Clarence Thomas each wrote separate concurring opinions to call into question high court precedent requiring deference to administrative interpretations of regulations.

Ruling Clarifies Agency Authority, Highlights Concerns

Adam Hansen, a plaintiffs' attorney with Nichols Kaster in Minneapolis, told Bloomberg BNA March 9 that the court's ruling is “an important victory for the rule of law and for a group of employees who were not treated fairly.” Hansen represented individual mortgage loan officers who intervened in the case.

By clarifying agencies' authority to change their interpretations under the APA, Hansen said “everyone will have a clearer idea of the rules of the game.”

Allyson Ho, a management attorney with Morgan, Lewis & Bockius in Washington, which represented the Mortgage Bankers Association in the case, said that although the Supreme Court rejected Paralyzed Veterans, it also recognized the “seriousness of the concerns” underlying that doctrine.

In the decision, for example, Sotomayor, acknowledged that “[t]here may be times when an agency's decision to issue an interpretive rule … is driven primarily by a desire to skirt notice-and-comment provisions.”

Samuel Shaulson of Morgan Lewis in New York said “there remains considerable doubt about the effect of the DOL's 2010 loan officer interpretation.”

“The majority made clear that deference to the agency’s position is not an inexorable command and that a regulation that conflicts with a prior interpretation is entitled to considerably less deference than a consistently held agency view,” he said. “Justices Alito, Scalia and Thomas went even farther, writing separate concurrences to invite the Court to reconsider whether federal agencies like the DOL are entitled to any deference at all when interpreting their own regulations.”

Tammy McCutchen, a management attorney and shareholder with Littler Mendelson in Washington, said in a March 9 statement to Bloomberg BNA that she wasn't surprised by the decision, which seemed to be “a pretty straightforward bit of statutory interpretation.”

McCutchen, who previously served as administrator of the WHD between 2001 and 2004, added that the ruling “should give the DOL confidence to issue more interpretations of its own regulations through administrator interpretations.”

The Labor Department didn't immediately respond to Bloomberg BNA's March 9 request for comment.

Conflict Between 2006 Letter, 2010 Interpretation

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

In the letter, the agency stated that in light of FLSA regulations issued in 2004, the duties and responsibilities of mortgage loan officers qualified them as administrative employees exempt from the law's minimum wage and overtime protections.

The letter reversed the DOL's stance in opinion letters from 1999 and 2001 stating that mortgage loan officers weren't FLSA-exempt.

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 Labor Department didn't engage in notice-and-comment rulemaking for the 1999, 2001, 2006 or 2010 interpretations.

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

The D.C. Circuit reversed in July 2013, following Paralyzed Veterans to find 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 in 2006 that loan officers fell within the FLSA's administrative employee exemption (720 F.3d 966, 20 WH Cases2d 1527 (D.C. Cir. 2013).

The Supreme Court agreed in June 2014 to review the case, and heard oral argument in December.

Interpretive Rules Don't Require Formal Rulemaking

In reversing the D.C. Circuit, Sotomayor explained that Section 4 of the APA (5 U.S.C. § 553(b)(A)) provides that its formal notice-and-comment rulemaking requirement doesn't apply to “interpretative rules, general statements of policy or rules of agency organization, procedure or practice.”

Interpretive rules, she said, are issued “by an agency to advise the public of the agency's construction of the statutes and rules which it administers.” Unlike legislative rules, which are subject to formal rulemaking, interpretive rules don't have the “force and effect of law.”

The D.C. Circuit in Paralyzed Veterans decided that when an agency provides a definitive interpretation of a regulation and later “significantly revises” that interpretation, it has effectively amended the rule and that amendments require notice-and-comment under the APA.

However, Sotomayor said APA Section 4's exemption of interpretive rules from formal rulemaking “is categorical” and “fatal” to the Paralyzed Veterans doctrine.

“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 when it amends or repeals that interpretive rule,” she said.

Rejecting MBA's Arguments

Sotomayor rejected several arguments raised by the MBA to uphold Paralyzed Veterans.

For example, she pointed to the MBA's contention that a significant change in an agency's interpretation of a regulation amounts to an amendment of the rule itself, observing that the association “does not explain how precisely, an interpretive rule changes the regulation it interprets.”

She added that the MBA also doesn't “say why its arguments regarding revised interpretations should not also extend to the agency's first interpretation,” which itself is an attempt to give “definite meaning to an ambiguous text—the very act MBA insists requires notice and comment.”

The association also presented a policy argument in support of Paralyzed Veterans, contending that the doctrine prevents agencies from “unilaterally and unexpectedly altering their interpretation of important regulations.”

Although Sotomayor acknowledged that an agency may decide to issue interpretive rules to bypass notice-and-comment requirements, she said regulated entities “are not without recourse in such situations.”

The APA, she said, “contains a variety of constraints on agency decisionmaking,” such as its provision invalidating regulations that are arbitrary and capricious.

In addition, Congress may include safe-harbor provisions within laws to shield employers from liability if their actions complied with previous agency interpretations, Sotomayor said. Such a safe harbor is included in the FLSA at 29 U.S.C. § 259(a), she said.

With respect to the MBA's argument that interpretive rules can have the force and effect of law because they may be entitled to deference under Auer v. Robbins, 519 U.S. 452 (1997), Sotomayor in a footnote observed that even if an interpretation receives Auer deference, courts must ultimately decide “whether a given regulation means what the agency says.”

“Moreover, Auer deference is not an inexorable command in all cases,” she said.

Concurrences: Reconsider Deference

Writing in three separate concurrences, Alito, Scalia and Thomas each suggested that the high court's line of precedent regarding judicial deference to administrative interpretations, which stemmed from Bowles v. Seminole Rock & Sand Co., 325 U.S. 410 (1945), should be reconsidered.

Scalia, for instance, observed that Section 706 of the APA expressly provides that a “reviewing court shall … interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action.” Despite Section 706, he said, the high court has “developed an elaborate law of deference to agencies' interpretations of statutes and regulations.”

In Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), Scalia said, the court held that “agencies may authoritatively resolve ambiguities in statutes.” And in Auer, the court further held that “agencies may authoritatively resolve ambiguities in regulations.”

“By supplementing the APA with judge-made doctrines of deference, we have revolutionized the import of interpretive rules' exemption from notice-and-comment rulemaking,” Scalia wrote. “Agencies may now use these rules not just to advise the public, but also to bind them. After all, if an interpretive rule gets deference, the people are bound to obey it on pain of sanction, no less surely than they are bound to obey substantive rules, which are accorded similar deference.”

As such, Scalia argued for abandoning Auer and applying the APA as written. “The agency is free to interpret its own regulations with or without notice and comment; but courts will decide—with no deference to the agency—whether that interpretation is correct,” he said.

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

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

Text of the opinion is available at http://www.bloomberglaw.com/public/document/Perez_v_Mortgage_Bankers_Assn_No_131041_and_131052_US_Mar_09_2015.