When the White House goes from a Democratic president to a Republican president, or vice versa, there are often changes in various federal agencies’ directives to reflect the priorities of the current administration. These changes are often implemented by a federal agency using its power to interpret its own regulations. Regulations become more stringent in some areas and relaxed in others. These 180-degree boomerang interpretations caused by “regime” changes can create significant frustrations for employers. The U.S. Department of Labor (DOL), for example, may decide that your sales workforce, which historically has been exempt from overtime regulations, must now be paid overtime. Or the U.S. Department of Transportation may decide that your sand truck and water truck drivers no longer qualify for an industry exemption to the Hours of Service rules.While federal agencies may have the right to change their mind and pursue different priorities, the organizations that are subject to their regulations demand that the agencies give them fair notice of regulatory interpretation changes to provide an opportunity to give feedback to these agencies on how proposed changes may impact their businesses. The agencies, however, insist that the Administrative Procedures Act does not require them to provide notice-and-comment rulemaking for interpretations of regulations, even if they have previously interpreted a regulation and are now changing their position. For federal agencies, notice-and-comment rulemaking is burdensome, political, and time-consuming.

In 1997, in Paralyzed Veterans of America v. D.C. Arena L.P., the D.C. Circuit Court of Appeals suggested, in dicta, that when a federal agency changes its definitive interpretation of a regulation, the change is, in effect, a change in the regulation without notice-and-comment rulemaking that would undermine the Administrative Procedures Act. In 1999, the D.C. Circuit upgraded this dicta into a holding by striking down the Federal Aviation Administration’s revised interpretation of its Alaskan hunting and fishing pilot guidelines. In Alaska Professional Hunters Association, Inc. v. FAA, the court stated that, “When an agency has given its regulation a definitive interpretation, and later significantly revises that interpretation, the agency has in effect amended its rule, something it may not accomplish without notice and comment.” This holding, commonly known as the Paralyzed Veterans doctrine (and also sometimes called the Alaska Hunters rule), generated significant debate among the circuit courts. The Third, Fifth, and Sixth Circuits adopted the Paralyzed Veterans doctrine; the First and Ninth Circuits rejected it. In 2006, the DOL issued an opinion letter stating that mortgage loan officers were “bona fide administrative employees” exempt from the overtime regulations of section 207(a) of the Fair Labor and Standards Act. After President Barack Obama took office, however, the DOL changed its mind. In 2010, Deputy Administrator Nancy J. Leppink of the DOL’s Wage and Hour Division issued an “Administrator’s Interpretation” declaring that mortgage loan officers “do not qualify as bona fide administrative employees.” In addition, she explicitly withdrew the DOL’s 2006 opinion letter.

The Mortgage Bankers Association (MBA) cried foul and challenged the Department of Labor’s 2010 interpretation in federal district court in Washington, D.C. Surprisingly, the district court rejected the MBA’s position, claiming that the MBA failed to show that it relied upon the 2006 opinion letter. On appeal, the D.C. Circuit reversed, holding that the Paralyzed Veterans doctrine requires only two elements to trigger notice-and-comment rulemaking: (1) a definitive interpretation; and (2) a significant change in the interpretation. With regard to the first element, evidence of reliance on an interpretation has helped courts determine whether an interpretation is definitive, but reliance is not a separate element. If the DOL wishes to change its interpretation, the D.C. Circuit stated, it must undertake notice-and-comment rulemaking.

The Supreme Court of the United States may soon settle the matter. On June 16, the Court granted certiorari in Perez v. Mortgage Bankers Association and Nickols v. Mortgage Bankers Association. (The Supreme Court consolidated the cases for oral argument.) The cases present significant ramifications for regulated parties and the federal government. The Paralyzed Veterans doctrine gives employers some peace of mind that when a federal agency interprets a regulation, it cannot be changed without a significant undertaking, and that employers have the ability to voice their concerns about any proposed change. For federal agencies and the executive branch of the federal government, Paralyzed Veterans takes away a powerful tool to quickly and easily implement policy. Oral argument has not been scheduled, but is expected in December 2014 or January 2015. A decision could be reached no later than next June.


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