On March 9, 2015, the Supreme Court held that agencies such as the Department of Labor (DOL) are not required to provide a public notice-and-comment period before implementing new interpretive rules, which includes agency letter opinions, even if they are contrary to an agency’s prior interpretative rules. Although the Court’s decision in Perez v. Mortgage Bankers Association is viewed as a “win” for the DOL and employees relying on DOL opinions in wage and hour litigation, the Court also noted that employers are still able to overcome the DOL’s backpedalling on earlier interpretations.

Background

The Fair Labor Standards Act (FLSA) requires employers to pay overtime wages to employees unless they are “employed in a bona fide … administrative … capacity.” The FLSA authorizes the DOL to issue regulations defining the contours of this administrative exemption, and the DOL is authorized to issue opinions interpreting its own regulations if they are ambiguous.

Pursuant to that authority, the DOL issued two letter opinions in 1991 and 2001 disqualifying mortgage-loan officers from the administrative exemption. In 2006, after it issued revised administrative exemption regulations in 2004, the DOL reversed course and opined that mortgage-loan officers fell within the administrative exemption. In 2010, however, the DOL withdrew its 2006 opinion and issued an Administrative Interpretation disqualifying mortgage-loan officers from the administrative exemption.

The Mortgage Bankers Association (MBA) subsequently filed a complaint in the Federal District Court for the District of Columbia challenging the DOL’s 2010 Administrative Interpretation. The MBA asserted the 2010 Administrative Interpretation was inconsistent with its 2004 regulations and, therefore, arbitrary and capricious. The MBA also argued, pursuant to circuit court precedent in Paralyzed Veterans of Am. v. D. C. Arena L. P., 117 F. 3d 579 (D.C. Cir. 1997), that the DOL’s Administrative Interpretation was procedurally invalid because it was issued without a notice-and-comment period required by Administrative Procedure Act (APA).

The APA requires agencies to provide public notice and consideration of comments to a proposed rule before it can be issued. This notice-and-comment requirement applies not only to the initial issuance of rules but also to subsequent repeals or amendments. The Paralyzed Veterans court held that an agency must use the APA’s notice-and-comment procedures when it issues a new interpretation of a regulation that deviates significantly from a previously adopted interpretation. The District Court granted summary judgment in favor of the DOL in the Perez case, but the D.C. Circuit Court of Appeals, applying Paralyzed Veterans, reversed.

The Supreme Court’s Decision

The Supreme Court approached the procedural validity of the DOL’s 2010 Administrative Interpretation as a simple question of whether the APA’s language required a notice-and-comment period for interpretative rules, and concluded that it did not. Specifically, Section 4 of the APA provides that the notice-and-comment period requirement does not apply to interpretative rules, which are statements issued by an agency advising of its construction of statutes and rules it administers. Without having to undertake the notice-and-comment process, issuing interpretative rules is far easier for agencies. The Court cautioned, however, that because interpretative rules are not subject to notice-and-comment, they “do not have the force and effect of law and are not accorded that weight in the adjudicatory process.”

MBA argued, among other assertions, that allowing an agency to issue an interpretation substantially inconsistent with a prior construction effectively amends the regulation administered by the agency and is procedurally unfair. After all, the MBA posited, DOL interpretations can have the practical force of law because an agency’s interpretation of its own regulation may be entitled to deference under Auer v. Robbins, 519 U.S. 452 (1997).

The Court rejected these arguments, noting that deference is inappropriate when the agency’s interpretation is “plainly erroneous or inconsistent with the regulation” it administers or “when there is reason to suspect that the agency’s interpretation does not reflect the agency’s fair and considered judgment.” Thus, an agency’s interpretation that conflicts with a prior interpretation is entitled to considerably less deference than a consistently held agency view. The Court also suggested an agency’s new policy position could be invalidated as arbitrary and capricious if it “rests upon factual findings that contradict those which underlay its prior policy; or when its prior policy has engendered serious reliance interests that must be taken into account.” Finally, the Court explained that Congress, being aware that agencies sometimes “upset settled reliance” on an agency’s interpretation, included a safe-harbor provision in the FLSA that protects employers. The FLSA, the Court noted, shields employers from liability when relying in good faith on any written administrative regulation, order, ruling, approval or interpretation of the DOL, even when it subsequently modifies or rescinds such guidance.

What the Perez Decision Means For Employers

It will be interesting to see whether the DOL will continue to issue new administrative interpretations that conflict with its prior letter opinions. It if does, the Court in Perez has signaled that district and appellate courts are expected to scrutinize more closely whether and to what extent such interpretations should be given deference. Employers should have a stronger footing when seeking to invalidate DOL interpretations that reverse its prior constructions. And employers, including those in the mortgage industry, may still benefit from relying on DOL opinions or interpretations that are subsequently rescinded or withdrawn.