Encino Motorcars, LLC v. Navarro - 136 S. Ct. 2117 (2016)

Rule:

Agencies are free to change their existing policies as long as they provide a reasoned explanation for the change. When an agency changes its existing position, it need not always provide a more detailed justification than what would suffice for a new policy created on a blank slate. But the agency must at least display awareness that it is changing position and show that there are good reasons for the new policy. In explaining its changed position, an agency must also be cognizant that longstanding policies may have engendered serious reliance interests that must be taken into account. In such cases it is not that further justification is demanded by the mere fact of policy change; but that a reasoned explanation is needed for disregarding facts and circumstances that underlay or were engendered by the prior policy. It follows that an unexplained inconsistency in agency policy is a reason for holding an interpretation to be an arbitrary and capricious change from agency practice. An arbitrary and capricious regulation of this sort is itself unlawful and receives no Chevron deference.

Facts:

The Fair Labor Standards Act (FLSA) requires employers to pay overtime compensation to covered employees who work more than 40 hours in a given week. In 1966, Congress enacted an exemption from the overtime compensation requirement for “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles” at a covered dealership. Fair Labor Standards Amendments of 1966, § 209, 80 Stat. 836, codified as amended at 29 U.S.C. §213(b)(10)(A). Congress authorized the Department of Labor to promulgate necessary rules, regulations, or orders with respect to this new provision. The Department exercised that authority in 1970 and issued a regulation that defined “salesman” 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 CFR §779.372(c)(1) (1971). The regulation excluded service advisors, who sell repair and maintenance services but not vehicles, from the exemption. Several courts, however, rejected the Department's conclusion that service advisors are not covered by the statutory exemption. In 1978, the Department issued an opinion letter departing from its previous position and stating that service advisors could be exempt under 29 U.S.C. §213(b)(10)(A). In 1987, the Department confirmed its new interpretation by amending its Field Operations Handbook to clarify that service advisors should be treated as exempt under the statute. In 2011, however, the Department issued a final rule that followed the original 1970 regulation and interpreted the statutory term “salesman” to mean only an employee who sells vehicles.  The Department gave little explanation for its decision to abandon its decades-old practice of treating service advisors as exempt under §213(b)(10)(A).

Petitioner Encino Motorcars, LLC is an automobile dealership. Respondents Hector Navarro, et al. are or were employed by Encino as service advisors. Respondents filed suit alleging that Encino violated the FLSA by failing to pay them overtime compensation when they worked more than 40 hours in a week. Encino moved to dismiss, arguing that the FLSA overtime provisions do not apply to respondents because service advisors are covered by the §213(b)(10)(A) exemption. The District Court granted the motion, but the Ninth Circuit reversed in relevant part. Deferring under Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S. Ct. 2778, 81 L. Ed. 2d 694, to the interpretation set forth in the 2011 regulation, the court held that service advisors are not covered by the §213(b)(10)(A) exemption.

Issue:

Was the Department of Labor's 2011 regulation, 29 C.F.R. § 779.372(c)(1), entitled to Chevron deference in deciding whether service advisors employed by Encino were exempt under 29 U.S.C.S. § 213(b)(10)(A) from the FLSA's overtime provisions?

Answer:

No.

Conclusion:

The court held that the 2011 regulation was issued without the reasoned explanation that was required in light of the Department's change from its longstanding position that service advisors were exempt under § 213(b)(10)(A). The Department 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. The lack of a reasoned explanation resulted in a rule that could not carry the force of law. Section 213(b)(10)(A) had to be construed without placing controlling weight on the 2011 regulation.