In a unanimous decision issued on Monday, March 9 in Perez v. Mortgage Bankers Association, the US Supreme Court has given the US Department of Labor and other executive branch agencies greater flexibility to change policy direction without going through the time-consuming notice-and-comment process spelled out in the Administrative Procedure Act (APA).

In 2010, the Department of Labor’s Wage & Hour Administration (Wage & Hour) issued an interpretation of its overtime regulations concluding that mortgage-loan officers are not exempt from the Fair Labor Standards Act’s overtime rules.  This interpretation reversed a 2006 Wage & Hour interpretation.  Wage & Hour did not give the public notice and an opportunity to comment on the reversal or on the 2006 interpretation.  Following its own precedent in Paralyzed Veterans of America v. D. C. Arena L. P., the powerful  U.S. Court of Appeals for the D.C. Circuit struck down Wage & Hour’s 2010 interpretation reasoning that an agency must use the APA’s notice-and-comment procedures when it issues a new interpretation of a regulation that deviates significantly from a previously adopted interpretation.

The Supreme Court unanimously reversed the D.C. Circuit, with the principal opinion authored by Justice Sonia Sotomayor.  Justice Sotomayor found that the D.C. Circuit’s Paralyzed Veterans rule contradicted the APA’s language expressly exempting “interpretive rules” from its notice-and-comment process. In essence, the Supreme Court found the D.C. Circuit imposed additional procedures on regulatory agencies that the APA neither requires nor permits.  Since it was an “interpretive rule” rather than a “legislative rule,” the Court concluded that the Department of Labor’s 2010 interpretation of its own regulations regarding exemptions from the FLSA’s overtime requirements should not have been struck down.  The Court did not render an opinion about how much deference courts should give to these sub-regulatory interpretations, but the general rule has been that less formal documents like sub-regulatory guidance and interpretations are afforded less deference than legislative regulations promulgated through the notice-and-comment process.

While the Court unanimously endorsed the result in today’s Mortgage Bankers case, three justices extended a clear invitation to parties to bring forward cases challenging “Auer deference” — that is, the doctrine that courts should defer to agencies’ interpretation of their own regulations.  Justices Alito, Scalia, and Thomas each wrote separately to state their willingness to overturn this doctrine as ungrounded in traditional administrative law principles and a judicial construct that is not required by the APA.  While three votes does not make for a Supreme Court majority, the other justices were not called on to opine about this issue in Mortgage Bankers. Thus, it is difficult to predict how a case challenging Auer deference would be decided.

For businesses and others seeking to effect policy change at the federal level, the Mortgage Bankers decision gives the executive branch broad flexibility to change policy direction, or clarify policy issues, by interpreting existing regulations without risk of being reversed by a court (at least on these grounds). The decision broadens the range of options in the public policy toolbox that businesses and their advocates should consider.