On June 20, 2016, the United States Supreme Court decided
Encino Motorcars v. Navarro, which reinforces that no
Chevron deference by courts to an agency's position is
warranted when an agency reverses its position and fails to explain
its change of course—particularly when the agency's prior
position was longstanding and had engendered significant actions
relying on it. The case involved the Department of Labor's
unexplained decision to reverse a long-held position exempting
service advisors at auto dealerships from overtime under the Fair
Labor Standards Act. On remand, the Ninth Circuit will analyze that
question in the absence of Chevron deference, as well as
in the face of two Justices' separate opinion rejecting as
"made up" the canon that courts must narrowly construe
FLSA exemptions.
Background About the Fair Labor Standards Act and Service
Advisors at Auto Dealerships
The underlying issue in Encino Motorcars was whether
service advisors at an auto dealership were entitled to overtime
pay under the Fair Labor Standards Act ("FLSA"). That
statute requires that employers pay overtime to employees who are
covered by the Act when they work more than 40 hours in a given
work week. In 1966, Congress added an exemption to the FLSA's
overtime requirements for "any salesman, partsman, or mechanic
primarily engaged in selling or servicing automobiles" at an
auto dealership. 29 U.S.C. § 213(b)(10)(A). The Department of
Labor issued regulations in 1970 that defined a
"salesman" for purposes of this overtime exemption 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." 29 C.F.R. § 779.372(c)(1)
(1971). The effect of this definition was that service advisors,
who sell maintenance and repair services but not vehicles, did not
fall within the exemption (and were therefore entitled to
overtime-pay protections).
After numerous courts rejected the Department of Labor's view
that service advisors did not fall within the exemption for
"salesman," however, the Department issued a 1978 opinion
letter stating that service advisors could fall within the
exemption. And in 1987, the Department updated its Field Operations
Handbook to make clear that service advisors should be treated as
exempt from the FLSA.
Decades later, the Department again reversed course. In 2011, it
promulgated a regulation returning to its original view that
service advisors were excluded from the definition of
"salesman." The regulation included little explanation
for why the Department had decided to depart from the official
position it had maintained since 1978—namely, that service
advisors were excluded from the FLSA's overtime requirements.
In fact, when changing its position in 2011, the Department offered
only the vague rationale that "the statute does not include
such positions and the Department recognizes that there are
circumstances under which the requirements for the exemption would
not be met." 76 Fed. Reg. 18,831, 18,838 (Apr. 5, 2011).
Current and former service advisors sued Encino Motorcars, LLC,
claiming that Encino failed to pay them overtime in violation of
the FLSA. Encino moved to dismiss, arguing that the service
advisors fell within the exemption for a "salesman" from
the FLSA's overtime provisions. The district court granted the
motion to dismiss.
The Ninth Circuit reversed, finding that Chevron deference
obligated the district court to defer to the Department of
Labor's 2011 interpretation. In so doing, the Ninth Circuit
created a split with the Fourth Circuit and the Montana Supreme
Court.
The Decision in Encino Motorcars
The Supreme Court's decision underscored that when an agency
changes positions without offering any support or rationale for
doing so, Chevron deference is inappropriate. Encino
Motorcars, LLC v. Navarro, 579 U.S. at ___, Slip Op. at 12.
That is because Chevron deference is inappropriate if the
agency's rulemaking is "procedurally
defective."
One of the ways that rulemaking can be "procedurally
defective" is if the agency does not "give adequate
reasons for its decisions," because the absence of even a
"minimal level of analysis" renders the agency's
action "arbitrary and capricious and so cannot carry the force
of law." Id. at 9. The Court noted that
"[a]gencies are free to change their existing policies"
but must "provide a reasoned explanation for the change"
to be accorded deference. Id. That is particularly so when
an agency's "longstanding policies may have
'engendered serious reliance interests that must be taken into
account.'" Id. (citation omitted).
Applying these principles to the Department of Labor's 2011
regulation, the Court found that the regulation is not entitled to
Chevron deference. Not only had "the Department
offered barely any explanation" for its decision to reverse
course in 2011 and re-apply the pre-1978 definition of
"salesman," but auto dealers "had relied since 1978
on the Department's [prior] position" and had
"negotiated and structured their [service advisor]
compensation plans" accordingly. Id. at 10. "In
light of the serious reliance interests at stake," the Court
found that "the Department's conclusory statements"
that the FLSA does not include service advisors "do not
suffice to explain its decision," and thus its 2011 regulation
was "a rule that cannot carry the force of law" and
"does not receive Chevron deference."
Id. at 12.
Because the Ninth Circuit had improperly accorded Chevron
deference to the Department's regulation, the Court vacated and
remanded the case to the Ninth Circuit for the purpose of deciding
whether the statute covers service advisors, without giving
Chevron deference to the 2011 regulation. Thus, the Court
did not resolve the ultimate question of whether service advisors
are entitled to overtime pay.
In a concurring opinion, Justice Ginsburg (joined by Justice
Sotomayor) insisted that nothing in Encino Motorcars
"disturbs well-established law." Nevertheless, the
concurring Justices cryptically noted that they were "not
persuaded that, sans Chevron, the Ninth Circuit should
conclude on remand that service advisors are categorically exempt
from hours regulations."
Justice Thomas's dissent (which Justice Alito joined) agreed
with the majority that the Department's 2011 regulation did not
deserve Chevron deference. But unlike the Court, the
dissenters would have reached the merits and decided whether the
FLSA requires overtime pay for service advisors, rather than
leaving that issue for the Ninth Circuit to decide in the first
instance. The dissenters would have read the FLSA's overtime
exemption for a "salesman" to apply to service advisors,
who are engaged in the selling of repairs and maintenance for
automobiles.
The dissent also emphasized that, on remand, the Ninth Circuit
should not apply "the made-up canon that courts must narrowly
construe the FLSA exemptions." It noted that on two recent
occasions, the Court had declined to apply that canon.
Additionally, quoting an amicus brief Jones Day filed on behalf of
entities including the Chamber of Commerce of the United States of
America, the dissenters explained that the canon itself appears to
"'res[t] on an elemental misunderstanding of the
legislative process.'"
Implications
Although the Supreme Court's decision in Encino
Motorcars did not resolve the ultimate question whether the
FLSA's overtime exemption applies to service advisors, the
decision is important for at least two reasons.
First, the decision exemplifies a careful approach to determining
whether the Chevron framework applies to a particular
interpretive question. Particularly in the wake of Encino
Motorcars, courts may be less inclined to reflexively apply
such deference in certain situations. The Court's decision
underscores how important it is for agencies to adequately explain
their decisions—especially when departing from a prior
position on which the business community has come to rely. In light
of the Encino Motorcars decision, courts might be more
receptive to arguments that an agency has inadequately justified
its change in position. And this, in turn, could increase
transparency in the administrative process.
Second, the dissenting opinion's harsh critique of "the
made-up canon that courts must narrowly construe the FLSA
exemptions"—which went unanswered by the other
Justices—further calls into question whether this purported
"canon" has any vitality going forward.
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