In a unanimous decision on Monday, March 9, 2015, the United States Supreme Court gave the Department of Labor (DOL) broad discretion to revise interpretive guidance with little notice. Federal agencies now have the authority to significantly change their prior interpretation of regulations without having to engage in formal rulemaking procedures.

Under the Administrative Procedure Act (APA), there is a distinction between “interpretative rules” and “legislative rules.” Interpretative rules are “issued ... to advise the public of the agency’s construction of the statutes and rules which it administers," as compared to “legislative rules,” which have the “force and effect of law” and, thus, must be issued through notice-and-comment rulemaking.

The Supreme Court’s decision came as a result of two consolidated cases: No. 13—1041, Perez et al. v. Mortgage Bankers Association et al., and Nickols et al. v. Mortgage Bankers Association, No. 13—1052. The court held that the APA exempts federal agencies, such as the Department of Labor (DOL), from undergoing formal notice-and-comment rulemaking in order to change rules interpreting regulations. Writing for the unanimous court, Justice Sonia Sotomayor noted that the formal notice-and-comment rulemaking provision of the APA does not apply to “interpretative rules, general statements of policy or rules of agency organization, procedure or practice.”

The decision comes after years of controversy over whether mortgage loan officers fall under the administrative exemption to the Fair Labor Standards Act (FLSA) and were therefore not entitled to overtime pay. In 1999 and 2001, the Wage and Hour Division of the DOL issued opinion letters holding that mortgage loan officers did notqualify for the administrative exemption to the FLSA overtime pay requirements. Then, in 2004, the DOL revised its regulations about the administrative exemption, which prompted the respondent (Mortgage Brokers Association) to ask the DOL for a reinterpretation of the regulations as they applied to mortgage-loan officers. In 2006, the DOL issued an opinion letter stating that mortgage-loan officers did qualify for the administrative exemption of the 2004 regulations. The issue arose in 2010 when the DOL − without engaging in notice-and-comment rulemaking procedures − withdrew its 2006 opinion and reversed course again through an administrator’s interpretation stating that mortgage-loan officers do not qualify for the administrative exemption. The issue before the Supreme Court was whether the DOL administrator’s interpretation was procedurally valid, given that it was issued without any formal rulemaking procedures.

The Supreme Court sided with the DOL and found that the administrator’s interpretation was procedurally valid. In so holding, the Supreme Court overturned a July 2013 D.C. Circuit decision that vacated the administrator’s interpretation based on Paralyzed Veterans of America v. D. C. Arena L.P., 117 F.3d 579 (D.C. Cir. 1997). Under the Paralyzed Veterans doctrine, an agency’s subsequent significant revision to a definitive interpretation effectively amended the rule, which, under the APA, can be done only via formal notice-and-comment procedures. In other words, under the Paralyzed Veterans doctrine, an agency must adhere to notice-and-comment procedures when it wishes to issue an interpretation of a regulation that deviates significantly from the agency’s previous interpretation.

The Supreme Court held that the Paralyzed Veterans doctrine “is inconsistent with [the APA] and must be rejected.” The court reasoned that “interpretative rules” are exempt from the formal notice-and-comment procedure because they exist merely to advise the public of the agency’s interpretation of a rule, as opposed to having the full effect of law. As Justice Clarence Thomas explained in his concurring opinion, “[a]n agency’s substantial revision of its interpretation of a regulation does not amount to an ‘amendment’ of the regulation as that word is used in the [APA].” As a result, mortgage-loan officers do not qualify for the administrative exemption and are entitled to overtime pay.

This is a significant decision, as it gives agencies more leeway in their ability to interpret their own regulations. As a result, we can expect to see the DOL and other agencies issue more interpretations without meaningful notice to the public.

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