On June 20, 2016, the Supreme Court of the United States held that the Department of Labor’s (“DOL”) 2011 regulation classifying “service advisors” as eligible for overtime pay under the Fair Labor Standards Act (“FLSA”) was not enforceable. See Encino Motorcars, LLC v. Navarro, 136 S. Ct. 890 (2016). The Court held the regulation was unenforceable because the DOL failed to sufficiently explain and support its 2011 change in its long-standing position that service advisors were exempt from overtime. This case is important because it shows that new regulations, especially those that contradict long-standing agency interpretations of federal statutes, may be successfully challenged in federal court. If your business is affected by such a change then you should consider having the matter reviewed by legal counsel.

In Encino, service advisors employed by a Los Angeles area Mercedes-Benz dealership filed suit in the United States District Court for the Central District of California alleging the dealership violated the FLSA by failing to pay them overtime wages when they worked in excess of 40 hours a week. The dealership argued that the FLSA’s overtime provisions did not apply because service advisors were statutorily exempt from being paid overtime. The dealership filed a motion to dismiss and it was granted by the District Court. On appeal, the Ninth Circuit Court of Appeals reversed and upheld the DOL’s 2011 regulation (codified at 29 C.F.R. § 779.372(c)(4)), which stated that service advisors are not covered by the statutory exemption and therefore are entitled to overtime pay. Encino appealed again and the Supreme Court granted certiorari.

Federal agencies are authorized by Congress to issue regulations interpreting the federal statutes they are responsible for enforcing. Federal agencies are allowed to change their interpretation of federal statutes over time. But the changes must be supported by satisfactory explanation and sound reasoning. If a federal agency fails to articulate a satisfactory explanation in support of its new interpretation then the regulatory change is considered arbitrary. For decades, the DOL had taken the position that service advisors employed by car dealerships were exempt employees who were not entitled to overtime pay. The 2011 regulation directly contradicted that long-standing interpretation, leaving dealers who had relied on the prior interpretation in a difficult situation. Most importantly, the DOL offered little to no explanation for the shift in its viewpoint. Due to the insufficient reasoning offered in support of the DOL’s new interpretation of the FLSA, the Court held that the 2011 regulation should not be enforced as law. The Supreme Court vacated the Ninth Circuit’s judgment and decided “it [was] appropriate to remand…to interpret the statute in the first instance.”

Key Takeaways:

  • When government agencies issue new regulations that change their established policies they must provide adequate reasoning for the change. Although agencies can change interpretations, sufficient reasoning and explanation must accompany the change. Conclusory statements which lack analysis or explanation will not suffice to explain the reason for the change, especially to industries which rely on the interpretations.
  • Federal courts have demonstrated a willingness to invalidate new regulations that are not supported by adequate reasoning. Agency regulations will not automatically be enforced as law if agency rule making requirements are not followed. In Encino, the Supreme Court focused on only enforcing new agency regulations that fully explain policy changes. The Court also stressed the importance of regulations adhering to statutory wording.
  • Under certain circumstances, employers may be able to prevent the enforcement of arbitrary and capricious regulatory changes through litigation. Encino Motorcars was able to successfully prevent the enforcement of an arbitrary regulatory change through litigation. Regulation through changes in interpretation will likely be a common tactic of federal agencies for the foreseeable future. When faced with substantial burdens imposed by new regulations, employers should consider seeking guidance from legal counsel on the enforceability of the regulatory change and the issue of whether a legal challenge to the regulation may be appropriate.