In January of this year, the Supreme Court, in a 8-0 decision (Kagan abstaining), ruled that medical residents were not students, and not exempt from paying FICA taxes. Mayo Foundation for Medical Education & Research v. U.S., No. 09-837, (January 11, 2011). However, this narrow holding does not convey the real importance of the Mayo decision and its substantial impact on judicial deference to administrative regulations.

Mayo paid its medical residents a stipend during their residency programs which entail formal educational training as well as 50 to 80 per week caring for patients. For years it treated its residents as exempt from FICA taxation based upon federal statute and Treasure Department regulations. In 2004, the Treasury Department issued regulations providing that individuals normally scheduled to work 40 hours or more per week are not students exempt from FICA taxation. Mayo filed suit claiming that the rule was invalid and the District Court agreed, concluding that the “unambiguous” text of the statute provided that the “employee” was a “student” so long as the education aspects predominate over the service aspect to the employer. The Government appealed and the Eighth Circuit Court of Appeal reversed, concluding that the statute was silent or ambiguous as to whether a medical resident working full-time for a school is a student for FICA purposes. The Eighth Circuit found that the Treasury Department’s newly amended regulation was a “permissible” interpretation of the statute.

Before the Supreme Court was the issue of which standard of deferential review to apply to administrative regulations. Mayo urged use of the standard adopted in 1979 in National Muffler Dealers Association. Under the National Muffler, the Supreme Court used a multi-factor analysis, examining whether the regulation was issued substantially contemporaneously with the statute; the length of time the regulation had been in effect; the reliance placed on it; the consistency of interpretation; and the degree of scrutiny that Congress had placed upon the regulation during re-enactments of the statute. The Government argued that the National Muffler standard had been superseded by the Court’s 1984 decision in Chevron U.S.A. v. Natural Resources Defense Council. Under the Chevron two-part framework, a court first asks whether Congress has “directly addressed the precise issue at question,” i.e., is the statute clear, or is it ambiguous or silent. Under the second part, a court examines whether the regulation is a permissible interpretation of the statutory text.

However, an agency rule will not be disturbed unless it is “arbitrary or capricious in substance, or manifestly contrary to the statute.” The Court also expressly stated that it would not apply a less deferential standard of review for tax regulations than it would use for review of other agency rules. The Court concluded that where an agency issues a regulation pursuant to an explicit authorization of Congress, and after notice-and-comment procedures, the rule merits Chevron deference. The Court concluded that the regulation was a reasonable interpretation of the statute, and that medical residents working full-time were not exempt from FICA taxation.

Mayo and the Future of Judicial Administrative Deference

At first glance, the Mayo decision is a large hammer and sword for administrative agencies seeking further judicial deference to their rules and regulations. The Court indicated that where the regulation is a result of rulemaking authority, and subject to notice-and-comment, the rule will be subject to Chevron deference, and upheld as long as it is a permissible or reasonable interpretation, and not manifestly contrary to statute, or arbitrary or capricious.

However, it appears that the Court may be faced with issues of congressional intent and legislative history in fleshing out its Mayo standard, given that this has played a role in Chevron deference in the past. The Court itself left open the issue of the amount of deference that should be accorded regulations issued to contravene Supreme Court rulings. Practitioners of all areas of substantive law can expect Mayo to be quickly winnowed and chiseled in future litigation.