Executive Summary: On March 9, 2015 the U.S. Supreme Court held that a federal agency is not required to engage in notice-and-comment rulemaking when it issues an interpretation of a regulation that is significantly different from its prior interpretation. In Nickols v. Mortgage Bankers Association, the Court overruled a line of cases established by the Ninth Circuit, which required administrative agencies to engage in notice-and-comment rulemaking when changing a prior administrative interpretation of an agency regulation.  Although the Court's ruling specifically addresses the actions of the U.S. Department of Labor (DOL), it could have significant ramifications in other areas as federal agencies continue their efforts to implement the Obama Administration's aggressive employment related agenda. 

Rulemaking under the Administrative Procedures Act

Under the Administrative Procedures Act (APA) federal agencies have authority to issue two types of rules: legislative and interpretive. Legislative rules have the force and effect of law, and agencies must engage in notice-and-comment rulemaking before issuing such rules. In notice-and comment rulemaking, the agency publishes a proposed rule in the Federal Register, accepts comments on the rule for a specific period of time, and, after reviewing the comments, publishes a final rule. Interpretive rules do not have the force and effect of law, thus agencies are not required to engage in notice-and-comment rulemaking before issuing such rules. 

Decision in Nickols

In Nickols, the Mortgage Bankers Associate (MBA) challenged the DOL's change in its position regarding whether mortgage loan officers fall within the administrative employee exemption to the minimum wage and overtime requirements of the Fair Labor Standards Act (FLSA). The DOL has changed its position on this issue over the years, issuing guidance in 1999 and 2001 stating that they do not fall within the exemption, then issuing guidance in 2006 stating that they do qualify for the administrative employee exemption. In 2010, the DOL changed position again and issued an Administrator's Interpretation (AI) concluding that mortgage loan officers "have a primary duty of making sales for their employers, and, therefore, do not qualify" for the administrative exemption. The opinion letters and interpretive guidance were issued without notice-and-comment rulemaking.

MBA filed suit in federal court, challenging the substance of the 2010 AI, as well as the procedure by which it was issued. The Court's decision in Nickols addresses only the procedural challenge – it did not rule on the substantive validity of the DOL's interpretation. MBA claimed the AI was procedurally invalid in light of Paralyzed Veterans of Am. v. D. C. Arena, a Ninth Circuit decision requiring administrative agencies to engage in notice-and-comment rulemaking before significantly revising an interpretation. The federal trial court ruled in favor of the DOL, and the D.C. Circuit Court of Appeals overruled this decision, vacating the 2010 AI. The Supreme Court overruled the D.C. Circuit, holding that the decision in Paralyzed Veterans is contrary to the text of the APA's rulemaking provisions and "improperly imposes on agencies an obligation beyond the ‘maximum procedural requirements' specified in the APA." 

The Supreme Court held that the decision in Paralyzed Veterans improperly conflates two different sections of the APA to find that notice-and-comment rulemaking is required when an agency significantly changes an earlier interpretation. "Because an agency is not required to use notice-and-comment procedures to issue an initial interpretive rule, it is also not required to use those procedures when it amends or repeals that interpretive rule."  

The Bottom Line:  

While this decision appears to be a straightforward interpretation of the provisions of the APA, it could have significant ramifications. The use of Administrator's Interpretations instead of opinion letters enables the DOL to give generalized opinions instead of limiting its opinion to a specific fact pattern as it did with opinion letters. In light of the Court's holding in Nickols, employers can expect more AIs from the DOL, many of which likely will take positions regarding various exemption issues that are contrary to the positions taken by prior administrations. For example, the DOL has already expressed its opinion that the use of a fluctuating workweek pay plan is incompatible with the payment of bonuses or incentives. Employers should anticipate a new AI from the DOL restating this opinion, which could have a significant impact on the way many employers compensate salaried non-exempt employees. Although interpretive rules do not officially have the force of law, they clearly reflect the agency's position on a particular issue, and courts generally give them deference (a practice strongly criticized by Justices Scalia and Thomas in their concurring opinions).