Reining in the Department of Labor: The Supreme Court Strikes Down Arbitrary Regulation

Date: June 22, 2016

A recurring question of concern is whether employees should properly be classified as “exempt” or “non-exempt” for the purposes of the Fair Labor Standard Act (FLSA)—which requires all non-exempt employees to be paid on an hourly basis, with overtime pay for hours worked in excess of 40 per week. This issue continues to be a major source of contention with the Department of Labor’s recently promulgated rule raising the salary threshold for “exempt employees.” So to help small business owners navigate these issues, we’ve put together a few resources: including a webinar on the new overtime rule, a top-line summary, and a guide to federal wage and hour law.
But in addition to its controversial overtime rule, we’ve also taken issue with the Department of Labor’s practice—under this Administration—of reversing long established interpretations of the FLSA. For example, when the Supreme Court heard arguments in Christopher v. SmithKline Beechum Corp, DOL argued that the Court should defer to its new interpretation—which reversed decades of DOL guidance as to whether pharmaceutical sales representatives should be classified as exempt. Likewise, in Perez v. Mortgage Bankers Association, DOL took a 180—completely rescinding a previous interpretation and pronouncing that mortgage loan officers are non-exempt employees. And a similar issue arose in Encino Motorcars, LLC v. Navarro, as DOL finalized regulations that reversed nearly 40 years of agency practice in interpreting FLSA, as allowing employers to classify “service advisors,” at car dealerships, as “exempt.” In each case, DOL reversed prior interpretations so as to force employers to treat these employees as non-exempt—which of course imposes real practical burdens on employers. 
We filed in each of these cases, and helped secure victories in two of three for small business. First, in SmithKline Beechum Corp., the Supreme Court held that agencies do not deserve deference when they change an established interpretation—at least not where an agency, or a plaintiff, seeks to apply to new interpretation retroactively. The Supreme Court expressly referenced NFIB Legal Center’s amicus brief at oral arguments. Writing for the Court, Justice Alito emphasized concerns that businesses may have relied on the prior interpretation, and that it would be manifestly unjust to subject them to liabilities for conduct that the agency had expressly blessed at the time.
Mortgage Bankers Association was more disappointing. A sharply divided Court ruled that an agency is permitted to reverse a prior interpretation without going through the formal notice and comment process required for substantive rules under the Administrative Procedures Act (APA). As we’ve emphasized elsewhere, the APA’s notice and comment requirement is essential for preserving some degree of transparency and accountability in the modern administrative state. And we’ve raised similar concerns in United States v. Texas. But in any event, Mortgage Bankers Association was at least helpful in making more clear that guidance and opinion letters that pronounce new interpretations must go through notice and comment if they effectively amend an existing regulation or statute. 
But, in Encino Motorcars, DOL actually went through the notice and comment process to formalize its changed position. And ordinarily courts will defer to an agency’s interpretation (even if it amounts to a policy reversal), if it’s gone through notice and comment. For those of us who take seriously concerns over separation of powers, and over the rise of the modern administrative state, this is a continuing source of frustration because it often results in courts rubberstamping agency action. But in Encico Motorcars the Court held—just this week—that an agency is entitled to no deference whatsoever for a procedurally invalid regulation, and ruled that DOL’s regulation was necessarily invalid because the agency had failed to adequately justify the reason for reversing its longstanding interpretation. DOL needed to at least offer some rationale for its changed interpretation—which the agency utterly failed to do here.
Of course, this only amounts to a modest check on arbitrary reversals. But a modest check is better than no check at all. And we thought it especially encouraging that Justice Kennedy once again echoed our concerns over industry’s reliance interests. As our Executive Director put it, “Federal agencies cannot whimsically flip-flop when interpreting federal law. Small businesses build their businesses on the expectation that they can rely on longstanding regulatory practices. So if an agency is going to all of the sudden pull the rug out from underneath the regulated community, and change a longstanding interpretation, they need to have a very good justification.” 
Interestingly, while this was a 6-2 decision, the two dissenting votes came from Justice Thomas and Alito—both of whom agreed with the majority that DOL’s rule was not entitled to Chevron deference here. But they would have gone even further than the majority, and would have reached the ultimate statutory question—as to whether auto service advisers may be classified as exempt employees under the FLSA? And on that issue they agreed with the arguments that we had raised—even quoting from the U.S. Chamber of Commerce amicus brief that we joined. Specifically, they said that FLSA exemptions should not be narrowly construed as the lower courts have so often assumed: 
“Respondents [] resist [the most] natural reading of the [FLSA] exemption by invoking the made-up canon that courts must narrowly construe the FLSA exemptions. The Ninth Circuit agreed with respondents on this score. The court should not do so again on remand. We have declined to apply that canon on two recent occasions, one of which also required the Court to parse the meaning of an [FLSA] exemption… There is no basis to infer that Congress means anything beyond what a statute plainly says simply because the legislation in question could be classified as ‘remedial.’ Indeed, this canon appears to ‘res[t] on an elemental misunderstanding of the legislative process,’ ‘that Congress intend[s] statues to extend as far as possible in service of a singular objective.’” 

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