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It is no secret that federal agencies have been very active in recent years in changing their regulations and interpretations of existing labor and employment law.  Some commentators even assert that federal regulators are virtually out of control, writing laws as they see fit without democratic votes or review by anyone.  Numerous examples are laws that Congress has refused to pass, and then the relevant federal agency turns around and makes "law" through regulation of what Congress had specifically rejected.  Some examples come to mind including LGBT issues, paid sick leave, expedited union elections, minimum wage changes, pay discrimination issues, and many others.  In June of this year, the U.S. Supreme Court in at least one case determined that federal regulators had gone too far and rejected the federal regulation that overturned many years of prior statutory interpretation.  Encino Motorcars, LLC v. Navarro, 26 WH Cases 2d 877 (June 20, 2016).

The details of the case are less important to those outside the automobile and truck dealership industry, than the principles.  The fact pattern dealt with an industry that had relied since 1978 on the Department of Labor’s position that service advisors are exempt from the wage-hour law’s overtime pay requirements.  Abruptly in a 2011 regulation, DOL totally changed its previous regulations and/or interpretations in this regard.  The DOL gave little explanation for its decision to abandon its decades-old practice in treating service advisors as exempt.  When an industry employer was sued for failing to pay overtime to certain service advisors, the employer moved to dismiss arguing that the wage-hour overtime provisions did not apply to service advisors because they were covered by a statutory exemption.

The Supreme Court addressed the right of federal agencies to change their regulations and interpretations and to what the extent the Court should defer to such regulations and interpretations.  It stated that in the usual course, when an agency is authorized by Congress to issue regulations and make a regulation interpreting a statute it enforces, the interpretation receives deference if the statute is ambiguous and if the agency’s interpretation is reasonable.  One ground for attacking a new regulation is whether it is "procedurally defective," meaning that the agency has erred by failing to follow the correct procedures in issuing the regulation.  One of the basic procedural requirements of administrative rule making is that an agency must give adequate reasons for its decisions.  Further, agencies are free to change their existing policies as long as they provide a reasonable explanation for the change.  But the federal agency must at least "display awareness that it is changing position" and "show that there are good reasons for the new policy."  In explaining its changed position, an agency must also be cognizant that long-standing policies may have "engendered serious reliance interest and it must be taken into account."  It follows that an "unexplained inconsistency" in agency policy is "a reason for holding an interpretation to be an arbitrary and capricious change from agency practice."

After addressing the above general principles of the right of federal agencies to issue or change regulations, the Court found that the regulations in question were issued without the reasoned explanation that was required in light of the change in position and the significant reliance interests involved.  When it came to explaining the "good" reasons for the new policy, the DOL said almost nothing.  It stated only that it would not treat service advisors as exempt because "the statute does not include such positions and the Department recognizes that there are circumstances under which the requirements of the exemption would not be met."  The Court cited that the DOL did not analyze or explain why the statute should be interpreted to exempt dealership employees who sell vehicles but not dealership employees who sell services (service advisors).  Thus, the Court ruled that the statute must be interpreted without placing controlling weight on the DOL regulation.  Under the circumstances, the federal regulation should not significantly affect the court’s interpretation of the statutory provisions. 

Editor’s Note:  This ruling is an informative and helpful description of the power of a federal agency to issue regulations, and to change its regulations and interpretations.  Readers should note that many regulations that have existed for many years have been radically changed in recent years, particularly this year.  Two such changes that come to mind include the NLRB "quickie election" rules and the DOL "persuader activity" regulations, both of which are discussed in other articles in this newsletter.  This new Supreme Court ruling shows examples of how such regulations can be attacked by employers as being unreasonable.

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