Authored by Barry Miller

On Monday, the Supreme Court issued its ruling in Perez v. Mortgage Bankers Association, examining the validity of the Department of Labor’s 2010 Administrator’s Interpretation on the application of the FLSA’s administrative exemption to mortgage loan officers. As noted in our previous post, the D.C. Circuit struck down the Administrator’s Interpretation because the DOL had abruptly reversed its own position on the issue, finding in a series of opinion letters that mortgage loan officers were exempt administrative employees, then issuing a surprise reversal of that position in the Administrator’s Interpretation. The D.C. Circuit’s decision was based on a line of cases that required an agency to undertake full notice and comment rulemaking when reversing course in its established views. The Supreme Court not only unanimously reversed the D.C. Circuit’s ruling, but also struck down the entire line of authority on which the D.C. Circuit based its ruling.

Notably, the Supreme Court did not hold that the Administrator’s Interpretation was well reasoned or valid. The Court merely held that the D.C. Circuit’s specific grounds for invalidating the Administrator’s Interpretation—the so-called Paralyzed Veterans doctrine—was contrary to the Administrative Procedures Act. The majority noted that the APA expressly exempts agencies from notice and comment rulemaking in establishing “interpretive rules” (as opposed to more formal “legislative rules”). The statute also states that an agency need not engage in any greater formal process to modify or rescind an interpretative rule than is necessary to adopt the rule in the first place. From these points, the Court concluded that notice and comment rulemaking is not necessary to modify or reverse an interpretive rule, as the DOL did in issuing the Administrator’s Interpretation.

In reaching this conclusion, the Supreme Court did not give free rein to agencies to promulgate interpretive rules and expect that courts will defer to them. Nor did the Court extend agencies’ unfettered liberty to flip-flop in their interpretations of the law. Justice Sotomayor noted that where an agency issues an informal, interpretive rule that is arbitrary or capricious, courts will not give it effect. Quoting prior precedent, the Court observed that an agency will be required to provide a more “substantial justification” for its rules when they are based “upon factual findings that contradict those that underlay its prior policy; or when its prior policy has engendered serious reliance interests,” noting that it “would be arbitrary and capricious to ignore such matters.”

The question of whether the DOL’s Administrator’s Interpretation was arbitrary or capricious was not before the Supreme Court (or the D.C. Circuit). The parties challenging the Interpretation made the argument in their initial lawsuit, but it was not one of the arguments that they advanced on appeal. Given the abrupt nature of the DOL’s change in its views and the potential impact that it had on a large number of employees, an argument that the Administrator’s Interpretation was arbitrary and capricious may still be viable in future litigation regarding the exempt status of mortgage loan officers. Indeed, even the format of the Administrator’s Interpretation raises questions about its value as an interpretation of the underlying regulations. While the DOL’s legislative rules note that “job title alone is insufficient to establish the exempt status of an employee” and the “exempt or nonexempt status of any particular employee must be determined on the basis of … the employee’s salary and duties,” the Administrator’s Interpretation offers a sweeping generalization about the exempt status of a vast number of employees working for thousands of different employers across the country, based on nothing more than their common job title.

It is also notable that, even if the Administrator’s Interpretation were taken at face value, it would not mean that all mortgage loan officers are non-exempt and overtime eligible. Indeed, many mortgage loan officers spend a significant amount of their working time outside their employers’ places of business, and as such, courts have entered summary judgment and jury verdicts confirming those employees’ exempt status as outside sales personnel.

As we predicted based on the oral argument of this case, the Supreme Court’s ruling leaves open the ultimate questions of whether and under what circumstances mortgage loan officers can meet the FLSA’s administrative exemption. Those open questions will continue to produce substantial uncertainty and litigation in the wake of this decision.