In Perez v. Mortgage Bankers Ass’n, 135 S. Ct. 1199 (2015), the Supreme Court held that the Administrative Procedure Act (“APA”), 5 U.S.C. § 500 et seq, does not require federal government agencies to use formal notice-and-comment rulemaking procedures when issuing a new interpretation of an existing regulation. This ruling upheld a regulatory interpretation that mortgage-loan officers did not fall under the administrative employee exemption of the Fair Labor Standards Act of 1938 (“FLSA”), 29 U.S.C. § 201 et seq, meaning the FLSA’s minimum wage and overtime standards apply to mortgage-loan officers.
The Administrative Rulemaking Process
The APA establishes the procedures federal administrative agencies use for rulemaking. Section 4 of the Act prescribes a three-step procedure for notice-and-comment rulemaking. First, the agency must issue a general notice of proposed rulemaking, ordinarily by publication in the Federal Register. Second, if notice is required, the agency must give interested persons an opportunity to participate in the rulemaking through submission of written data, views, or arguments. An agency must consider and respond to significant comments received during the period for public comment. Third, when the agency promulgates the final rule, it must include in the rule’s text a concise general statement of its basis and purpose.
Not all rules must be issued through the notice-and-comment process. Section 4 provides that, unless another statute states otherwise, the notice-and-comment requirement does not apply to interpretative rules. The critical feature of interpretive rules is that they are issued by an agency to advise the public of the agency’s construction of the statutes and rules which it administers.
This dispute began as a result of efforts by the Department of Labor to determine whether mortgage-loan officers are covered by the FLSA. The FLSA establishes a minimum wage and overtime compensation for each hour worked in excess of 40 hours in each workweek for many employees. Certain classes of employees, however, are exempt from these provisions. Among these exempt individuals are those “employed in a bona fide executive, administrative, or professional capacity . . . or in the capacity of outside salesman . . . .”
The FLSA grants the Secretary of Labor authority to define and delimit the categories of exempt administrative employees. The Secretary’s current regulations regarding the administrative exemption were promulgated in 2004 through notice-and-comment rulemaking. In 2006, the Department issued an opinion letter finding that mortgage-loan officers fell within the administrative exemption under the 2004 regulations. Later, the Department’s 2010 interpretation concluded that mortgage-loan officers have a primary duty of making sales for their employers and, therefore, do not qualify for the administrative exemption. The Department accordingly withdrew its 2006 opinion letter, which it now viewed as relying on misleading assumptions and selective and narrow analysis of the exemption example. Notably, like the 2006 opinion letter, the 2010 interpretation was issued without notice or an opportunity for comment.
The Mortgage Bankers Association (“MBA”) filed a complaint in federal district court challenging the interpretation. MBA argued that the interpretation was procedurally invalid in light of the D.C. Circuit’s decision in Paralyzed Veterans v. D.C. Arena L.P., 117 F.3d 579 (D.C. Circuit 1997). Under the Paralyzed Veterans doctrine, if an agency has given its regulation a definitive interpretation, and later significantly revises that interpretation, the agency has in effect amended its rule, something it may not accomplish under the APA without notice and comment.
The district court granted summary judgment to the Department. The district court determined that the Paralyzed Veterans doctrine was inapplicable because MBA had failed to establish its reliance on the contrary interpretation expressed in the Department’s 2006 opinion letter. MBA appealed to the D.C. Circuit, which reversed the ruling and rejected the Government’s call to abandon the Paralyzed Veterans doctrine. In the circuit court’s view, the only question properly before it was whether the district court had erred in requiring MBA to prove that it relied on the Department’s prior interpretation. Explaining that reliance was not a required element of the Paralyzed Veterans doctrine, and noting the Department’s concession that a prior, conflicting interpretation of the 2004 regulations existed, the D.C. Circuit concluded that the 2010 Administrator’s Interpretation should be vacated.
Supreme Court Holds Agencies Are Not Required to Use Notice-and-Comment Procedures When Amending or Repealing Interpretive Rules
The Secretary appealed the Perez case to the United States Supreme Court, which reversed the D.C. Circuit and held that the Paralyzed Veterans doctrine is contrary to the clear text of the APA’s rulemaking provisions. The Supreme Court explained that the D.C. Circuit’s mistake was focusing its attention on Section 1 of the Act rather than examining the exemption for interpretive rules in Section 4. Section 1 defines “rule making” to include not only the initial issuance of new rules, but also repeals or amendments of existing rules. The D.C. Circuit reasoned that because notice-and-comment requirements may apply even to these later agency actions, allowing 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. The Supreme Court further explained that this reading of the APA conflates the differing purposes of Sections 1 and 4. Section 1 defines what a rulemaking is. It does not, however, say what procedures an agency must use when it engages in rulemaking. That is the purpose of Section 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.
Supreme Court Notes FLSA’s Safe-Harbor Provision Regarding Wages and Compensation
Additionally, the Court noted that Congress is aware that agencies sometimes alter their views in ways that upset settled reliance interests. For that reason, Congress sometimes includes in its statutes safe-harbor provisions that shelter regulated entities from liability when they act in conformance with previous agency interpretations. The FLSA includes one such provision. The Act provides that no employer shall be subject to any liability for failing to pay minimum wages or overtime compensation if it demonstrates that the act or omission complained of was in good faith in conformity with and in reliance on any written administrative regulation, order, ruling, approval, or interpretation of the Administrator of the Department’s Wage and Hour Division, even when the guidance is later modified or rescinded. These safe harbors will often protect parties from liability when an agency adopts an interpretation that conflicts with its previous position.
Lessons for Employers
In light of Perez, employers of mortgage-loan officers should make certain they are complying with the minimum wage and maximum hour requirements under the FLSA. Employers should also regularly check the Department of Labor’s opinion letters for new interpretations of existing regulations and update their policies accordingly. In the event of a lawsuit for failing to follow a newly issued interpretation, employers should take advantage of the FLSA’s safe harbor provision by gathering evidence to show they were conforming with and relying on the agency’s former interpretation in good faith.
If you have any questions about the FLSA or FLSA exemptions, drafting appropriate wage and hour policies for your business, or you are involved in litigation over a wage and hour dispute, please contact the Minnesota wage and hour law attorneys of Trepanier MacGillis Battina P.A.
About the Author:
Minnesota wage and hour attorney Nathan R. Snyder represents employers and employees in matters involving wage and hour regulations, overtime pay, and misclassifications under the FLSA and the MFLSA. Nate may be reached at 612.455.6218 or firstname.lastname@example.org. Trepanier MacGillis Battina P.A. is a Minnesota wage and hour law firm located in Minneapolis, Minnesota.