Group of professionals discuss finance

Breaking news and expert analysis on legal and compliance issues

[Back To Home][Back To Archives]

From Banking and Finance Law Daily, June 20, 2016

No deference due regulation without reasoned explanation for change in policy

By Ronald Miller, J.D.

The Supreme Court has rendered an opinion concerning an action by the Department of Labor that may serve as a reminder to all government agencies that when deviating from established policies, agencies must provide a reasoned explanation for the change. The Court, in a 6-2 decision, held that a change in a longstanding DOL policy regarding overtime compensation under the Fair Labor Standards Act (FLSA) was not entitled to Chevron deference. Because the 2011 regulation implementing the change is inconsistent with the DOL’s earlier position—that the industry had significantly relied on since 1978—and the DOL failed to provide a reasoned explanation for the change, the High Court determined that the rule cannot carry the force of law. Justice Ginsburg, with whom Justice Sotomayor joined, filed a separate concurring opinion. Justice Thomas filed a separate dissenting opinion in which Justice Alito joined (Encino Motorcars, LLC v. Navarro, June 20, 2016, Kennedy, A.).

Dealership overtime exemption. In 1966, Congress enacted an exemption from the overtime compensation requirement of the FLSA for "any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles" at a covered dealership. In 1970, the DOL issued a regulation that defined "salesman" to mean "an employee who is employed for the purpose of and is primarily engaged in making sales or obtaining orders or contracts for sale of the vehicles . . . which the establishment is primarily engaged in selling," 29 CFR Sec.779.372(c)(1). This regulation excluded service advisors, who sell repair and maintenance services, but not vehicles, from the exemption.

Three years later, the Fifth Circuit rejected the Department’s conclusion that service advisors are not covered by the statutory exemption. In the meantime, Congress amended the statutory provision by enacting its present text, which now sets out the exemption in two subsections. The first subsection is at issue in this case.

Change in course. In 1978, the DOL issued an opinion letter that departed from its previous position and stated that service advisors could be exempt. In 1987, the Department confirmed its new interpretation by amending its Field Operations Handbook to clarify that service advisors should be treated as exempt under the statute. Yet in 2011, the DOL changed course and issued a final rule that followed its original 1970 regulation and interpreted the statutory term "salesman" to mean only an employee who sells vehicles.

Service advisor litigation. Service advisors at an automobile dealership brought a suit under the FLSA alleging that their employer failed to pay them required overtime wages. The employer countered that the service advisors were exempt from the overtime provisions of the FLSA as engaged in selling or servicing automobiles, and a district court granted the employer’s motion to dismiss.

In its 2011 rulemaking, the DOL explained that the auto dealership exemption at issue here, Sec. 779.372(c), applied only "to salesmen who sell vehicles and partsmen and mechanics who service vehicles." Under the DOL’s interpretation, the service advisors didn’t meet either of those definitions and thus were not exempt. Applying the two-step Chevron analysis, the Ninth Circuit found that the relevant statutory text was capable of several different interpretations. Parting ways with the Fourth and Fifth Circuits, the Ninth Circuit then reversed the district court’s dismissal of the service advisors’ FLSA and state-law overtime claims, granting Chevron deference to the DOL’s regulatory definitions in the face of statutory ambiguity.

Prior position abandoned. Notably, the DOL gave little explanation for its decision to abandon its decades-old practice of treating service advisors as exempt, observed the Supreme Court. As a consequence, the Court ruled that the exemption in 29 U.S.C. Sec. 213(b)(10)(A) must be construed without placing controlling weight on the Department’s 2011 regulation. The High Court explained that when an agency promulgates a regulation for a statute that it enforces, the interpretation receives deference if the statute is ambiguous and the agency’s interpretation reasonable. However, Chevron deference is not warranted where the regulation is "procedurally defective"—that is, where the agency errs by failing to follow the correct procedures in issuing the regulation.

“Unexplained inconsistency.” While agencies are free to change their existing policies, they must recognize that longstanding policies have "engendered serious reliance interests that must be taken into account." An "[u]nexplained inconsistency" in agency policy is "a reason for holding an interpretation to be an arbitrary and capricious change from agency practice." An arbitrary and capricious regulation receives no Chevron deference.

The 2011 regulation here was issued without the reasoned explanation that was required in light of the DOL’s change of position and the significant reliance by industry on the interpretation since 1978 that service advisors are exempt from the overtime provisions of the FLSA, reasoned the Court. The DOL did not analyze or explain why the statute should be interpreted to exempt dealership employees who sell vehicles but not dealership employees who sell services, and this lack of reasoned explanation was inconsistent with the Department’s longstanding earlier position. Accordingly, the 2011 regulation could not receiveChevron deference, and the decision of the Ninth Circuit was reversed.

Concurrence. Justice Ginsberg agreed that, in issuing its 2011 rule, the Department of Labor did not satisfy its basic obligation to explain "that there are good reasons for [a] new policy," as required by FCC v. Fox Television Stations, Inc. While the DOL may have had adequate reasons to construe the automobile-dealership exemption as it did, the 2011 rulemaking gave the Court precious little about what those reasons are, observed Ginsberg. However, unlike the dissent, Justice Ginsberg was not persuaded that the Ninth Circuit should conclude on remand that service advisors are categorically exempt from hours regulations.

Justice Ginsberg wrote separately to stress that nothing in the majority opinion disturbs well-established law. Where an agency departs from a prior position, there is no "heightened standard" of arbitrary-and-capricious review. An agency must "display awareness that it is changing position" and "show that there are good reasons for the new policy." The Court’s bottom line remains unaltered: "‘[U]nexplained inconsistency’ in agency policy is ‘a reason for holding an interpretation to be an arbitrary and capricious change from agency practice.’"

Dissent. In his dissenting opinion, although Justice Thomas agreed with the majority’s conclusion that the Court owed no Chevron deference to the DOL’s position because the regulation was "procedurally defective," he disagreed with the ultimate decision to "punt on the issue." Justice Thomas argued that the Court had the obligation to decide the merits of the question presented: Whether the FLSA exemption excluded service advisors for automobile dealerships from overtime compensation. Finding that the service advisors were salesmen primarily engaged in the selling of services for automobiles, Justice Thomas would reverse the Ninth Circuit’s judgment.

Expert commentary. Commenting on the decision, Employment Law Daily advisory board member Brooke Duncan (Adams & Reese, LLP) observed that the decision offers a welcome acknowledgement by the Court that federal agencies (here, the Department of Labor, but the NLRB should take heed) must give reasoned, clear explanations when they swerve from well-established rules and policies.

Deference to agency rule-making has its limits, especially when a practice permitted for decades in an industry is suddenly outlawed. For the Department of Labor to have merely said its new interpretation was reasonable, without analysis, obviously stuck in the craw of the Court, Duncan noted.

Thrust of dissent. Interestingly, the thrust of the dissent seems to be that the statute itself is clear on the question of exempting service advisors from overtime—the majority remanded for further statutory interpretation, but the dissent would reverse outright rather than "punting" (as Justice Thomas described the majority opinion). Even more welcome would have been an outright declaration that the exemption applies, said Duncan, since now, with another crack at statutory interpretation, the Ninth Circuit could come back and effectively side with the DOL.

"Nonetheless, the Court is making it clear that it disfavors wild deviations in rules enforcement, and employers will find much to cite from this decision in future challenges to agency actions," Duncan concluded.

Signal to federal agencies. Asked whether the Court was in some way signaling federal agencies that it will be taking a closer look at significant changes in long-established administrative policies, Employment Law Daily advisory board member Richard Gerakitis (Troutman Sanders LLP) responded, "Actually, I think that SCOTUS gave us this signal back in Perez v Mortgage Bankers Assoc. last year. The takeaway from Mortgage Bankers was that litigants were now required to show what is substantively wrong with an agency’s interpretation—for example, that it upsets reliance interests, is unlawful, or is overly vague. When challengers can show that an agency’s interpretation is substantively objectionable, the APA gives courts authority to intervene. And without express reference to Mortgage Bankers, it appears that Encino Motorcars followed that direction on challenging the 2011 interpretation by DOL of §213(b)(10)(A)."

Reasoned change. With respect to whether the "reasoned change" that the Court is now requiring differs from the explanation that was necessary in the past to change a regulation or its interpretation, Gerakitis observed that "while the law on challenging DOL interpretations (or other agencies’ under the APA) remains as it was in Mortgage Bankers, Justice Ginsberg offers one bonus for the agencies in footnote 2 of her concurrence. She foresees that reliance will not prove insurmountable in many instances. And reliance will likely be something that the Ninth Circuit will focus on during remand because it’s one way to cut off Encino Motorcars’ challenge directly."

Asked about the practical effects of this decision, he cautioned that "the downside for employers is that independent auto dealers will be easy prey for FLSA claims, but not likely targets for collective actions as the collectives will not warrant collective pursuit."

Get to the merits. Justices Thomas and Alito would have ruled on the merits that the exemption applies. When asked why he thought the majority wouldn’t go there, Gerakitis gave this takeaway: "The concurrences in Mortgage Bankers as well as the majority in Encino Motorcars share a concern that administrative agencies might abuse their power to change interpretations of regulations. That concern does not fall on either the employee or the employer side—it falls on the Congressional side and whether the agencies act as Congress intends.

The case is No. 15-415.

Attorneys: Paul D. Clement (Bancroft PLLC) for Encino Motorcars, LLC. Stephanos Bibas, University of Pennsylvania Law School, for Hector Navarro.

Companies: Encino Motorcars, LLC

MainStory: TopStory PrudentialRegulation SupremeCtNews

Back to Top

Banking and Finance Law Daily

Introducing Wolters Kluwer Banking and Finance Law Daily — a daily reporting service created by attorneys, for attorneys — providing same-day coverage of breaking news, court decisions, legislation, and regulatory activity.

A complete daily report of the news that affects your world

  • View full summaries of federal and state court decisions.
  • Access full text of legislative and regulatory developments.
  • Customize your daily email by topic and/or jurisdiction.
  • Search archives for stories of interest.

Not just news — the right news

  • Get expert analysis written by subject matter specialists—created by attorneys for attorneys.
  • Track law firms and organizations in the headlines with our new “Who’s in the News” feature.
  • Promote your firm with our new reprint policy.

24/7 access for a 24/7 world

  • Forward information with special copyright permissions, encouraging collaboration between counsel and colleagues.
  • Save time with mobile apps for your BlackBerry, iPhone, iPad, Android, or Kindle.
  • Access all links from any mobile device without being prompted for user name and password.