June 20, 2016

Supreme Court Decides Encino Motorcars, LLC v. Navarro

On June 20, 2016, the U.S. Supreme Court decided Encino Motorcars, LLC v. Navarro, holding that a Department of Labor formal regulation that reversed the Department’s longstanding informal position exempting service advisors at car dealerships from federal overtime rules was not entitled to Chevron deference because it was arbitrary and capricious for lack of a sufficient explanation of the change.

The Fair Labor Standards Act contains an exemption from its overtime provisions for “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles” for an auto dealer. In 1978, the Department of Labor issued an opinion letter interpreting the exemption to include dealership “service advisors” who sell “repair and maintenance services” for vehicles. In 2008, the Department issued a notice of proposed rulemaking “to revise its regulations to accord with existing practice by interpreting the exemption . . . to cover service advisors.” But in 2011, “the Department changed course” and issued “a final rule that took the opposite position from the proposed rule,” interpreting the statute not to exempt service advisors from the overtime rules. The Department provided no explanation for the change and scarcely any justification for the position it was taking.

The Court of Appeals for the Ninth Circuit applied Chevron deference to the Department’s 2011 interpretation and held that it was valid.

The Supreme Court reversed, holding that the regulation was arbitrary and capricious for lack of even minimal supporting analysis and therefore lacked the force of law under the Administrative Procedure Act. The Court explained that the “decades of industry reliance on the Department’s prior policy” meant that the Department had a “duty” to offer more than a “summary discussion” of “why it deemed it necessary to overrule its previous position.” Here, “the Department offered barely any explanation” for the change and “did not analyze or explain why the statute should be interpreted” to exempt auto salesmen but not service advisors. “This lack of reasoned explication for a regulation that is inconsistent with the Department’s longstanding earlier position results in a rule that cannot carry the force of law. It follows that this regulation does not receive Chevron deference.” The Court therefore vacated the judgment and remanded for the Ninth Circuit to reinterpret the statute without Chevron deference.

Justice Kennedy delivered the opinion of the Court, in which Chief Justice Roberts and Justices Ginsburg, Breyer, Sotomayor, and Kagan joined. Justice Ginsburg filed a concurring opinion, in which Justice Sotomayor joined. Justice Thomas filed a dissenting opinion, in which Justice Alito joined.

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