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In an era of aggressive federal agency action, the U.S. Supreme Court’s recent decision on how those agencies can go about changing their own guidance may add fuel to the fire. In a unanimous decision issued on March 9th, the Court held that federal agencies are exempt from formal rulemaking requirement when changing interpretations regarding the regulations that they enforce. Perez v. Mortgage Bankers Association, 575 U.S. ___ (2015).

Background Facts

In 2010, the U.S. Department of Labor (“DOL”) issued an “Administrator Interpretation” that reversed its longstanding position on the exempt status of mortgage loan officers.  In a series of earlier Wage Hour Opinion Letters, the DOL had indicated that mortgage loan officers were exempt administrative employees.   However, in 2010, the DOL issued an Administrator’s Interpretation stating that most mortgage loan officers did not qualify for the administrative exemption to the Fair Labor Standard Act’s overtime requirement and should now be considered non-exempt.

The Mortgage Bankers Association (“MBA”), a real estate finance industry group, challenged the DOL’s new interpretation by questioning the agency’s ability to change its position without formal rulemaking. The MBA argued that in order to make such a significant change in interpretation the DOL had to comply with formal rule-making requirements under the federal Administrative Procedure Act. The MBA asserted that the DOL had not complied with the process because it did not hold a notice-and-comment period during which interested parties could express opinions prior to any change in the agency’s interpretation about the mortgage loan officers’ exempt status. In an initial victory, the D.C. Circuit Court of Appeals agreed with the MBA and vacated the DOL’s Administrator Interpretation.

On appeal to the Supreme Court, the DOL argued that the D.C. Circuit’s opinion—that notice-and-comment rulemaking is required before any significant change to a rule that interprets a regulation—is inconsistent with the Congressional-approved flexibility the agencies have to issue  interpretive rules related to the regulations that they enforce.   The Supreme Court agreed with the DOL holding that federal agencies do not have to engage in formal rulemaking before making changes—even significant changes—to their own rules interpreting federal regulations.

Significantly, however, the Court’s decision did not give the agencies unfettered discretion.  The Court noted that an agency will be required to provide a more “substantial justification” for a change in interpretation when the new interpretation contradicts “its prior policy; or when its prior policy has engendered serious reliance interests.” The Court also noted that where an agency issues an informal, interpretive rule that is arbitrary or capricious, courts will not give it effect.

What does this decision mean for employers?

This decision means that federal agencies can make changes—potentially significant—without prior notice to existing agency rules and guidance as well as agency policies, procedures, and practices.  In a period of aggressive agency enforcement activity, employers relying on federal agency guidance in implementing employment policies and making strategic decisions must carefully monitor the activity of agencies, such as the DOL, NLRB, and EEOC, to ensure that they are not relying on outdated authority that no longer reflects those agencies’ positions.

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