In a recent Supreme Court case regarding FLSA overtime and exempt employee rules, the Court refused to give deference to certain DOL regulations without the DOL's reasoned explanation for policy changes. This decision could have wider implications regarding labor regulations.
The underlying issue in Encino Motorcars, LLC v. Navarro
The United States Supreme Court recently ruled on the Ninth Circuit's decision regarding automobile service advisors' entitlement to overtime compensation. The case involved the dealership overtime exemption, which has been modified over the years by various DOL rule statements and regulations. Initially, "any salesman, parts man, or mechanic primarily engaged in selling or servicing automobiles" was exempt from overtime compensation.
In 1970, the DOL issued a regulation effectively excluded service advisors, who sell repair and maintenance services, but not vehicles, from the exemption. Then in 1978, the DOL issued an opinion letter that contradicted this previous position, stating that service advisors could, in fact, be exempt.
Yet in 2011, the DOL changed course once again, issuing a final rule that interpreted the statutory term "salesman" to mean only an employee who sells vehicles. This meant that service advisors were again excluded from the exemption.
Substantial changes in long-standing policies require reasoned explanation
The Supreme Court found that the DOL's 2011 regulation was inconsistent with its longstanding position, and that this drastic change was not supported by any reasonable explanation offered by the Department. Furthermore, the Court reasoned, the fact that the industry had been relying on the initial rule for so long, negotiating and structuring compensation plans based on the initial rule that the drastic change was even more unreasonable. Ultimately, the Supreme Court ruled that the DOL's rule could not carry the force of law.
Deference to DOL interpretations requires reasonableness
The Supreme Court focused on the fact that the DOL gave little explanation for its decision to abandon its decades-old practice of treating service advisors as exempt. As the Court explained, when the DOL promulgates a regulation for a statute that it enforces, the interpretation receives deference only if the statute is ambiguous and the agency's interpretation is reasonable.
Furthermore, although agencies like the DOL are free to change their existing policies, they must consider that longstanding policies are being relied upon and any "[u]nexplained inconsistency" will likely make the interpretation arbitrary and capricious, which in turn receives no deference.
The 2011 regulation regarding service advisors was issued without any reasoned explanation. In fact, 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. This absence of a reasoned explanation led the Court to hold that the 2011 regulation could not receive deference.
What you should take from this decision is that deference to agency rule-making is certainly not unlimited. This is especially true when a practice allowed for decades in a particular industry is suddenly forbidden.
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