It is by now settled that federal agencies have broad authority to fill the gaps left by Congress. When an agency has been entrusted with administering an ambiguous statute, the agency’s interpretation need only be “reasonable” to be controlling in court.

The implied premise of so-called Chevron deference is that there will sometimes be more than one “reasonable” course that an agency might choose. The agency’s choice may well be driven by ideological concerns—the sorts of concerns that sometimes change with the winds of political change.

So what to do when an agency changes its mind?

The general rule is that agencies are free to replace one reasonable interpretation with another, so long as they acknowledge that they are displacing existing law. But a Supreme Court decision issued last month appears to have added an additional obstacle that an agency must overcome if it wishes to change course.

In Encino Motorcars, LLC v. Navarro, No. 15-415 (U.S. June 20, 2016), the Supreme Court issued a unanimous reminder that Chevron is not absolute, refusing to accord deference to a Department of Labor regulation interpreting a narrow question about the Fair Labor Standards Act.

The regulation at issue concerned whether service advisors at automobile dealerships are entitled to time-and-a-half overtime pay for working more than 40 hours in a given week. By statute, “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, trucks, or farm implements” is exempted from the right to overtime pay. And from 1978 until 2011, the Department of Labor’s position was that service advisors fell within the statutory definition of “salesman.”

In 2008, the Department issued a notice of proposed rulemaking that would codify that longstanding interpretation. But the final regulation, issued in 2011, abruptly changed course and defined “salesman” to mean only an employee who sells automobiles, trucks, or farm implements—and not one who sells automobile service.

In last month’s decision, the Supreme Court declined to defer to the 2011 regulation. The Court held that the regulation was procedurally defective because it failed to explain why the Department was abandoning its longstanding interpretation and failed to account for the reliance interests engendered by the previous interpretation. As a result of the procedural defect, the Court held that the regulation was not entitled to any deference.

The Court’s six-Justice majority, in an opinion written by Justice Kennedy, directed that the underlying claim for overtime pay be remanded to the Ninth Circuit for a determination of whether the statute, interpreted de novo, entitles the plaintiff to overtime pay. Justice Thomas, joined by Justice Alito, issued a dissenting opinion. While agreeing that the regulation was not entitled to deference, Justice Thomas would have proceeded to reject the plaintiff’s claim for overtime on the merits.

The Court’s emphasis on reliance interests is not entirely new, but the Court appears to have expanded the attention to reliance interests from an issue that would rarely come into play into an issue at the core of Chevron analysis—at least where an agency has changed its position.

That emphasis on reliance interests has not gone unnoticed. In PHH Corp. v. CFPB, PHH is challenging Director Cordray’s interpretation of Section 8 of the Real Estate Settlement Procedures Act (“RESPA”), which PHH contends to be a change in the law. Just three days after the Supreme Court issued its opinion in Encino Motorcars, PHH filed a letter in the D.C. Circuit apprising the court of the decision and arguing that Director Cordray had failed to take seriously the reliance interests inherent in the longstanding government interpretation of Section 8.

A decision in PHH is expected by the end of the summer. That case will shed early light on whether Encino Motorcars will make it harder for agencies to abandon their longstanding positions.

 

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