Health Reform WK-EDGE No deference to agency without reasoned explanation for policy change
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Friday, June 24, 2016

No deference to agency without reasoned explanation for policy change

By Ronald Miller, J.D. and Bryant Storm, J.D.

An agency violates one of the basic procedural requirements of administrative rulemaking when it fails to give adequate reasons for its decision to change existing policy after decades of consistent interpretation. The U.S. Supreme Court, in a six-to-two decision, held that the Department of Labor (DOL) failed to give a reasoned explanation for a 2011 regulation that changed a decades old policy exempting automobile service advisors from entitlement to overtime compensation under the Fair Labor Standards Act (FLSA). The High Court concluded that the 2011 regulation was not entitled to Chevron deference and vacated the Ninth Circuit’s contrary ruling. Justice Ginsburg, with whom Justice Sotomayor joined, filed a separate concurring opinion. Justice Thomas filed a separate dissenting opinion in which Justice Alito joined (Encino Motorcars, LLC v. Navarro, June 20, 2016, Kennedy, A.).

Overtime exemption. In 1966, Congress enacted an exemption from the overtime compensation requirement of the FLSA for "any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles" at a covered dealership. In 1970, the DOL issued a regulation that defined "salesman" to mean "an employee who is employed for the purpose of and is primarily engaged in making sales or obtaining orders or contracts for sale of the vehicles . . . which the establishment is primarily engaged in selling." The regulation excluded service advisors—who sell repair and maintenance services, but not vehicles—from the exemption.

Change in course. However, in 1978, the DOL issued an opinion letter that departed from its previous position and stated that service advisors could be exempt. In 1987, the DOL confirmed its new interpretation by amending its Field Operations Handbook to clarify that service advisors should be treated as exempt under the statute. Yet in 2011, the DOL changed course again and issued a Final rule that followed its original 1970 regulation and interpreted the statutory term "salesman" to mean only an employee who sells vehicles.

Service advisor litigation. Service advisors at an automobile dealership brought a suit under the FLSA alleging that their employer failed to pay them required overtime wages. The employer countered that the service advisors were exempt under the most recent DOL definition. A district court granted the employer’s motion to dismiss. On appeal, the Ninth Circuit applied a two-step Chevron analysis and found that the relevant statutory text was capable of several different interpretations. Because the court determined that the statute was ambiguous, the court reasoned that the DOL regulatory definition was entitled to deference. Accordingly, the Ninth Circuit reversed the district court’s dismissal of the service advisors’ overtime claims, noting that under the DOL regulations, service advisors were exempt from the FSLA overtime provisions.

Prior position abandoned. The Supreme Court noted that the DOL gave little explanation for its decision to abandon a decades-old practice of treating service advisors as exempt. As a result, the Court ruled that the exemption must be construed without placing controlling weight on the DOL’s 2011 regulation. The High Court explained that when an agency promulgates a regulation for a statute that it enforces, the interpretation receives deference if the statute is ambiguous and the agency’s interpretation is reasonable. However, the Court explained that Chevron deference is not warranted when a regulation is "procedurally defective."

Reasoned explanation. The Court held that while agencies are free to change existing policies,significant diversions form longstanding policies must be supported by adequate rationale. The Court reached "the unavoidable conclusion . . . that the 2011 regulation was issued without the reasoned explanation that was required in light of the Department’s change in position and the significant reliance interests involved." The Court noted that an "[u]nexplained inconsistency" in agency policy is "a reason for holding an interpretation to be an arbitrary and capricious change from agency practice." Regulations that are deemed to be arbitrary and capricious are not entitled to Chevron deference. Thus, the Supreme Court held that because the DOL did not analyze or explain why the statute should be interpreted inconsistently with the DOL’s longstanding earlier position, the 2011 regulation could not receive Chevron deference.

The case is No. 15-415.

Attorneys: Colin Calvert (Fisher & Phillips, LLP) for Encino Motorcars, LLC. S. Keven Steinberg (Thompson Coe & O'Meara, LLP) for Hector Navarro.

Companies: Encino Motorcars, LLC

Cases: CaseDecisions NewsFeed AgencyNews SupremeCtNews

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