As we discussed recently, this month marked the opening of the Supreme Court’s new term. For employment law practitioners, this session will be particularly busy with seven cases analyzing a range of employment questions, from the scope of the EEOC’s duty to conciliate discrimination claims to the applicability of whistleblower protection laws and the Pregnancy Discrimination Act. In Part 1 of this series, we discussed Integrity Staffing Solutions, Inc. v. Busk.

The other wage and hour case to watch this term is Perez v. Mortgage Bankers Association, which is set for oral argument on December 1. Although the case deals with a wage and hour interpretation, the decision could have far-reaching implications for federal agencies from the DOL to the NLRB and more. The question the Supreme Court will try to resolve is whether a federal agency (the Department of Labor in this case) must engage in a notice-and-comment rulemaking pursuant to the Administrative Procedure Act before it can significantly alter an interpretive rule that articulates an interpretation of an agency regulation.  Put simply, can federal agencies simply “flip flop” interpretations with each new administration, or do they have to go through the more laborious process of promulgating new regulations first?

Now-consolidated petitions in Perez v. Mortgage Bankers Association and its companion case, Nickols v. Mortgage Bankers Association, were brought, respectively, by the Secretary of Labor and an intervening mortgage loan officer. In 2006, the Bush administration DOL issued an opinion letter in which it announced an interpretation of the revamped 2004 FLSA rules as applied to mortgage loan officers. Under those rules, the DOL opined that mortgage loan officers would be exempt from overtime under the administrative exemption. Four years later, in 2010, DOL did an about-face and issued an a new Administrative Interpretation in which it withdrew its 2006 opinion letter and announced a contrasting interpretation, namely that the loan officers were not exempt from overtime after all. This pendulum swinging from administration to administration is probably all-too-familiar for any attorney or employer who follows the NLRB, but it has become part and parcel of the regulatory process.

The Mortgage Bankers Association sued to overturn the DOL’s 2010 interpretation, but the D.C. district court dismissed the challenge. The district court held that the plaintiff had not established that it had detrimentally and justifiably relied on the 2006 interpretation.  As a result, because the 2010 interpretation was “not inconsistent with the 2004 regulations and is not arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,” the agency had acted within its power to change its interpretation.  (The “arbitrary and capricious” standard the district court used reflects the very low bar that an agency must normally clear when taking actions.) The D.C. Circuit reversed, relying on a series of rulings and other dicta dating to 1997, disagreeing that a plaintiff challenging the new rule must show reliance on the previous version. The D.C. Circuit instead held that an agency may not change any interpretation of a rule without engaging in the notice and comment rulemaking process. The Fifth Circuit has also adopted the same doctrine, but the First, Second, Fourth, Sixth, Seventh, and Ninth Circuits have rejected it.  It is this split that the Supreme Court will hopefully rectify.

A decision upholding Mortgage Bankers Association would likely eliminate agencies’ practice of releasing “guidance” documents (like the EEOC has done frequently in the past few years) or pushing regulated parties into compliance with the threat of adverse guidance or litigation. The DOL has been particularly aggressive in using this approach, even staking out new interpretive positions in amicus briefs and then later requesting that courts give those statements deference. If agencies can no longer avoid (or evade) the arduous procedural requirements of the APA, employers would be less apt to be whipsawed by successive administrations. The downside of upholding Mortgage Bankers Association, though, could be that agencies retreat and become less transparent, less predictable, and more hesitant to provide any guidance at all for fear of having their informal positions invalidated anyway. As I said last week, Congress has frankly ceded too much authority to the agencies to legislate. The only way to resolve this issue permanently would be for Congress to take the reins when drafting laws, rather than leaving agencies to fill in the gaps.