On March 9, 2015, the Supreme Court of the United States ruled that the Paralyzed Veterans doctrine, which requires an agency to use the notice-and-comment procedures of the Administrative Procedure Act (APA) when issuing a new interpretation of a regulation that deviates significantly from a previously adopted interpretation, is not consistent with the APA. According to the court, the doctrine—which benefited employers by assuring them that a federal agency interpretation of a regulation could not be changed without a significant undertaking—is contrary to the clear text of the APA’s rulemaking provisions and improperly imposes on agencies an obligation beyond the APA’s maximum procedural requirements.
The Paralyzed Veterans doctrine creates a judge-made procedural right, the Court found, namely “the right to notice and an opportunity to comment when an agency changes its interpretation of one of the regulations it enforces.” However, “imposing such an obligation is the responsibility of Congress or the administrative agencies, not the courts,” the Court concluded. Perez v. Mortgage Bankers Association, No. 13–1041, Supreme Court of the United States (March 9, 2015).
The case arose from a dispute regarding whether mortgage loan officers were covered under the Fair Labor Standards Act (FLSA). On March 24, 2010, the U.S. Department of Labor (DOL) issued an administrative interpretation finding that the administrative exemption to the FLSA did not apply to loan officers. The administrative interpretation, issued without public comment through rulemaking, reversed an earlier 2006 Bush administration DOL Opinion Letter, which had concluded that loan officers satisfied the administrative exemption to the FLSA’s minimum wage and overtime requirements. (This 2006 opinion letter was contrary to 1999 and 2001 opinion letters finding that mortgage loans offices were not exempt administrative employees.) This reversal caught the banking industry off guard and spawned a series of class and collective actions alleging misclassification of loan officers.
The APA provides that its notice-and-comment requirement does not apply to interpretative rules unless notice is otherwise required by statute. Under District of Columbia Circuit Court of Appeals precedent, beginning with Paralyzed Veterans of Am. v. D. C. Arena L. P., however, material changes to prior interpretations may not be accomplished under the APA without notice and comment.
The D.C. Circuit’s stance on the APA was shared by the Fifth Circuit Court of Appeals. In contrast, the First Circuit Court of Appeals and Ninth Circuit Court of Appeals had concluded that the APA allows agencies to amend interpretive rules without notice-and-comment rulemaking. Based on its interpretation of the APA, in July 2013, the D.C. Circuit, in Mortgage Bankers Association v. Harris, 720 F.3d 966 (D.C. Cir. 2013), vacated the DOL’s 2010 administrative interpretation. This decision was later appealed to the Supreme Court of the United States. The Supreme Court heard oral argument in December of 2014.
The Supreme Court’s Decision
In a 9-to-0 decision, the Supreme Court held that federal agencies are not required to go through formal rule-making to make significant changes to rules interpreting regulations. Justice Sotomayor, who authored the opinion, wrote that “[t]he text of the APA answers the question presented.” Section 4 of the APA, which provides for an opportunity to participate in rule-making, does not apply to interpretive rules. Section 1, Justice Sotomayor found, defines “rule making” to include the initial issuance of new rules, repeals, or amendments of existing rules. In Paralyzed Veterans, the Court found, the D.C. Circuit had reasoned that because notice-and-comment requirements may apply to later agency actions (such as repeals and amendments), “allow[ing] an agency to make a fundamental change in its interpretation of a substantive regulation without notice and comment” would undermine the APA’s procedural framework.
According to the Supreme Court, this interpretation of the APA “conflates the differing purposes of §§1 and 4 of the Act.” While section 1 defines what a rule-making is, it does not prescribe the procedures an agency must use when it engages in rulemaking—the purpose of section 4 of the Act. The “D.C. Circuit correctly read §1 of the APA to mandate that agencies use the same procedures when they amend or repeal a rule as they used to issue the rule in the first instance,” the Court found. The D.C. Circuit erred, however, in applying section 1 to an interpretive rule, which section 4 exempts from the notice-and-comment requirement:
Where the court went wrong was in failing to apply that accurate understanding of §1 to the exemption for interpretive rules contained in §4: 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 Court concluded that its “straightforward reading of the APA . . . harmonizes with longstanding principles of our administrative law jurisprudence.” Additionally, the Court rejected three arguments put forth by the Mortgage Bankers Association in defense of the Paralyzed Veterans doctrine, including the claim that an interpretation that significantly alters an agency’s prior interpretation effectively amends the regulation. The Court rejected the Mortgage Bankers Association’s “‘interpretation-as-amendment’ theory” on the basis of the legal and ordinary use of the word “amend.”
This decision reinforces the point that reliance on the administrative exemption to the FLSA for loan officers is misplaced. This does not mean that loan officers cannot be exempt under the FLSA. The DOL has long maintained that loan officers can satisfy the requirements of the outside sales exemption under certain circumstances. DOL Wage Hour Op. Ltr. No. FLSA2006-11 (Mar. 31, 2006). “The outside sales exemption holds the most promise for financial firms to classify mortgage loan officers as exempt under the FLSA, but it is not a panacea,” according to Alfred B. Robinson, Jr. a shareholder in the Washington, D.C. office of Ogletree Deakins, who issued the 2006 opinion letter while serving as the acting Administrator of the Wage and Hour Division (WHD) of the DOL.
Courts have been inconsistent in their application of the outside sales exemption to loan officers. The primary point of contention is whether the loan officers are “customarily and regularly engaged away from the employer’s place or places of business” in performing sales work, and whether the promotional work they perform is incidental to and in furtherance of their own sales, as opposed to in furtherance of an attempt to increase the company’s business. Courts holding that the outside sales exemption applies to loan officers look for employees whose activities outside of the office are consistent and critical to the sales process. In contrast, courts have been reluctant to apply the outside sales exemption to employees assigned to company offices, who routinely work from home, and who have little face-to-face contact with customers.
Those relying on the outside sales exemption should be mindful of the potential changes to the exemption. On March 13, 2014, President Obama signed a presidential memorandum to update the overtime regulations under the FLSA. The memorandum specifically directs the Secretary of Labor to “propose revisions to modernize and streamline the existing overtime regulations.” In doing so, the Secretary of Labor is required to “consider how the regulations could be revised to update existing protections consistent with the intent of the Act; address the changing nature of the workplace; and to simplify the regulations to make them easier for both workers and businesses to understand and apply.” The rulemaking is expected to change the criteria for an employee to be exempt under the outside sales exemption. No details have been released about what changes may be proposed, but a quantification analysis for determining how much time an employee spends on “primary duties” is a possibility.
Robinson, who also co-chairs the firm’s Wage and Hour Practice Group agreed: “An interesting aspect of the Court’s decision is the three concurring opinions in which Justices Alito, Scalia, and Thomas opened the door for a case in which the Court can review the precedent for addressing the deference reviewing courts should accord an agency’s interpretations of its regulations.”
According to Harold P. Coxson, a principal with Ogletree Governmental Affairs, Inc. and a shareholder in the Washington, D.C. office of Ogletree Deakins, “The broader implication of the Supreme Court’s ruling is to allow federal agencies to engage in sub-regulatory changes to established agency interpretations. This is bad news for open and transparent government by refusing to insist on formal notice and comment rulemaking for changes reversing established precedent rather than behind the scenes revisions, which only need be announced to the regulated community.”