Supreme Court Holds Federal Agencies May Reverse Their Positions Through Informal Guidance

On March 9, 2015, the U.S. Supreme Court issued its decision in Perez v. Mortgage Bankers Ass’n, No. 13-1041 (Mar. 9, 2015), holding federal administrative agencies may amend or repeal interpretive rules without following notice and comment procedures. The case dealt with the U.S. Department of Labor’s (DOL) 2010 Administrator’s Interpretation holding mortgage loan officers generally are non-exempt for purposes of the minimum wage and overtime requirements of the federal Fair Labor Standards Act (FLSA), but the Court’s decision has broader implications beyond the DOL and the FLSA.

APA

The federal Administrative Procedure Act (APA) sets the procedures that federal agencies must use for rulemaking. The APA distinguishes between legislative rules and interpretive rules. Courts give more deference to legislative rules than to interpretive rules because legislative rules are considered to have the force and effect of law, whereas interpretive rules are considered to be the agency’s construction of the statutes and rules it administers.

Under the APA, when issuing legislative rules, federal agencies must follow notice and comment procedures (i.e., they must notify the public that they intend to issue legislative rules and must provide the public with an opportunity to submit comments to the agency regarding the proposed legislative rules).  On the other hand, the APA does not require federal agencies to follow notice and comment procedures when issuing interpretive rules.

In 1997, in the Paralyzed Veterans case, the U.S. Court of Appeals for the D.C. Circuit held that, under the APA, when a federal agency wishes to issue a new interpretation of a regulation that deviates significantly from an interpretation the agency previously adopted, the agency must follow notice and comment procedures.

FLSA

Under the FLSA, non-exempt employees are entitled to minimum wage and overtime compensation. If an employee meets all the requirements of at least one exemption, the employee is exempt. In 1999 and 2001, the DOL issued opinion letters (interpretive rules) holding mortgage loan officers generally are non-exempt. In 2004, the DOL issued a regulation following notice and comment procedures (a legislative rule) addressing employees in the financial services industry. In 2006, the DOL issued an opinion letter (an interpretive rule) interpreting the 2004 regulation and holding mortgage loan officers generally are exempt. In 2010, the DOL issued an Administrator’s Interpretation without following notice and comment procedures (an interpretive rule) withdrawing its 2006 opinion letter and holding mortgage loan officers generally are non-exempt.

The Mortgage Bankers Association sued the DOL, contending that, under Paralyzed Veterans, the DOL was required to follow notice and comment procedures when issuing the 2010 Administrator’s Opinion because the 2010 Administrator’s Opinion was a new interpretation of a regulation that deviated significantly from an interpretation the agency previously adopted (i.e., the 2006 opinion letter).

Supreme Court’s Decision

The question before the Supreme Court was whether the Paralyzed Veterans decision was consistent with the APA. The Supreme Court held it was not. Under the APA, a federal agency is not required to follow notice and comment procedures when issuing an interpretive rule. Thus, the Supreme Court held, a federal agency is not required to follow notice and comment procedures when issuing an interpretive rule that deviates significantly from a previous interpretive rule. In other words, because the DOL was not required to follow notice and comment procedures when issuing the 2006 opinion letter, it also was not required to follow notice and comment procedures when issuing the 2010 Administrator’s Opinion withdrawing the 2006 opinion letter.

Takeaways

Employers (especially in the financial services industry) should carefully consider whether their employees are properly classified as exempt under the FLSA. Misclassifying a non-exempt employee as exempt may lead to significant liability. The DOL soon will issue new regulations (legislative rules) revising the requirements for certain exemptions but, in the meantime, employers need to keep abreast of changes to interpretive rules. Failure to do so could lead to wage hour claims and greater damages.

This case has broader implications beyond the DOL and the FLSA. The Supreme Court’s decision may encourage the DOL and other federal agencies to reverse their positions on other issues which may adversely affect employers. This may be likely given the Obama administration’s tendency to favor individuals over employers. If you have questions about this topic or other employment matters, feel free to contact any of Faegre Baker Daniels’ labor and employment attorneys.