Yesterday, in Encino Motorcars v. Navarro, No. 15-415, the U.S. Supreme Court vacated a Ninth Circuit ruling that had deferred to a Department of Labor 2011 regulation that auto service advisors were nonexempt and should receive overtime compensation. The justices said the DOL issued the regulations giving “little explanation for its decision to abandon its decades-old practice of treating service advisors as exempt under section 213(b)(10(A) of the FLSA” and ordered the Ninth Circuit to reconsider the case without deferring to the regulations.

The plaintiffs are service advisors who worked at a Mercedes-Benz dealership in California. They alleged that the dealership had incorrectly treated them as exempt from overtime under an FLSA exemption for salespeople, partspeople or mechanics primarily engaged in selling or servicing automobiles, trucks or farm implements through a dealership. The federal district court granted the dealership’s motion to dismiss finding that the advisors were exempt under this provision. The Ninth Circuit Court of Appeals reversed in relevant part and construed the statutory exemption not to apply to service advisors. In reaching its decision, the Ninth Circuit deferred to a 2011 Department of Labor regulation which states that the exemption does not apply to dealership service advisors, giving the agency regulation deference pursuant to Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).

Under Chevron, courts should defer to an agency interpretation if the statute is ambiguous and if the agency’s interpretation is reasonable. In Encino Motorcars, the Supreme Court refused to give Chevron deference to the 2011 regulation because the DOL ignored one of the basic procedural requirements of administrative rulemaking by failing to give adequate reasons for its decisions. The DOL had previously issued opinion letters and stated in its Field Operations Handbook that service advisors would be considered exempt. Additionally, in its 2008 Notice of Proposed Rulemaking, the DOL proposed to confirm the applicability of the exemption to service advisors in a final regulation. Dealerships had relied on the DOL’s interpretations for decades in classifying their service advisors as exempt; however, the Department changed course completely when it issued its 2011 final regulation which provided that service advisors were not exempt.

The Supreme Court, finding that dealerships had relied on the DOL’s prior interpretation and the DOL provided “barely any explanation” for changing its position, refused to apply Chevron deference to the 2011 regulations and vacated the decision. The case has been remanded to the Ninth Circuit for reconsideration of whether the exemption applies without giving deference to the regulation.

The opinion provides a reminder that agency interpretations do not have the force of statutes and are entitled to judicial deference only under proper circumstances. The Court’s decision also sends a message to federal agencies that they do not have unfettered authority and regulations issued without following proper procedures or providing adequate explanation will not receive deference.