On June 20, 2016, the United States Supreme Court gave the U.S. Department of Labor (DOL) a lecture about proper rulemaking in the case of Encino Motorcars v. Hector Navarro. At issue was whether service advisors at automobile dealerships could be considered exempt employees for purposes of federal overtime law. But instead of answering that question, the Supreme Court called out the DOL for bad rulemaking and sent the case back to the lower appeals court for a fresh look.
The plaintiffs in Encino Motorcars were service advisors at an automobile dealership. Service advisors interact with customers and sell them services for their vehicles. A service advisor's duties may include meeting customers; listening to their concerns about their cars; suggesting repair and maintenance services; selling new accessories or replacement parts; recording service orders; following up with customers as the services are performed (for instance, if new problems are discovered); and explaining the repair and maintenance work when customers return for their vehicles.
The law in question in Encino Motorcars was a section of federal overtime law that exempts certain employees of automobile dealerships from the requirements for overtime pay. Specifically, federal law does not require overtime pay for "any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, trucks, or farm implements." The contention in the case was whether service advisors come within the scope of that overtime exemption.
The dispute in Encino Motorcars was complicated by the DOL's changing position on whether service advisors are included within the scope of the dealership exemption. The DOL originally stated in 1970 that service advisors were outside that exemption's scope. Then in 1978 the DOL unofficially changed its position and advised that service advisors were exempt employees. In 2008 it proposed to make that position official by promulgating a new overtime regulation that would specifically include service advisors within the scope of the dealership exemption. But when that new overtime rule was published in 2011, without explanation the DOL eliminated any reference to service advisors as exempt employees and returned full circle to its original 1970 position that service advisors were not included within the dealership exemption.
The Supreme Court didn't like the DOL's unexplained shift in position regarding the exempt status of service advisors: "One of the basic procedural requirements of administrative rulemaking is that an agency must give adequate reasons for its decisions. The agency 'must examine the relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made. . . .' That requirement is satisfied when the agency's explanation is clear enough that its 'path may reasonably be discerned. . . .' But where the agency has failed to provide even that minimal level of analysis, its action is arbitrary and capricious and so cannot carry the force of law." The court noted that agencies are free to change their existing policies as long as they provide a reasoned explanation for the change.
Applying those principles to the DOL overtime rule at issue in Encino Motorcars, the court determined that the DOL had not adequately explained its shift in positions. The court stated that "[t]his lack of reasoned explication for a regulation that is inconsistent with the Department's longstanding earlier position results in a rule that cannot carry the force of law." Because the lower court had given the DOL's rule the force of law when it shouldn't have, the Supreme Court sent the case back to the lower court for a new review.