Legal Alert: Federal Courts Deal a Blow to DOL Regulatory Efforts

Date   Jul 16, 2013

Executive Summary:  Recently, two different federal courts have invalidated statutory interpretations by the Department of Labor's Wage and Hour Division (WHD).  Generally, WHD may create regulations on its own to assist in clarifying ambiguities and to fill statutory gaps within the Fair Labor Standards Act (FLSA).  The current administration has used this administrative process to modify the law in ways that advance its agenda, often without much, if any, input from employers.  The federal court decisions striking down the DOL's aggressive campaign to modify wage-and-hour law through the regulatory process will hopefully send a message that the DOL must stay within the powers delegated to it by Congress, including obtaining employer perspectives when necessary. 

In the first decision, an Oregon federal district court invalidated regulations issued by WHD prohibiting agreements between employers and their employees allowing employers to retain employee tips and prohibiting tip pools from including non-tipped employees – even if the employer does not take a tip credit.  In the second decision, the D.C. Circuit Court of Appeals invalidated WHD's 2010 Administrator's Interpretation, which opined that individuals employed as mortgage bankers were not exempt from the FLSA's overtime and minimum-wage requirement under 29 U.S.C. 213(a)(1).  These decisions are a good sign that the DOL's aggressive regulatory efforts will not go unchecked by the courts.

Mortgage Bankers Association v. Harris

In Mortgage Bankers Assoc. v. Harris, No. 12-5246 (D.C. Cir. July 2, 2013), the United States Court of Appeals for the D.C. Circuit vacated WHD's Administrator's Interpretation FLSA 2010-1, because the DOL reversed its position on the exempt status of mortgage loan officers without adhering to public notice and comment rulemaking requirements.

In 2006, the DOL opined that typical mortgage loan officers were exempt administrative employees.  In 2010, the DOL reversed course and found that the administrative exemption did not apply to such employees.  The Mortgage Bankers Association (MBA) challenged the 2010 interpretation, arguing that the DOL was not permitted to change its "definitive interpretation" of the FLSA without first undergoing notice and comment rulemaking pursuant to the Administrative Procedure Act.  The District Court denied the MBA's motion for summary judgment, finding that notice and comment was not required because MBA had not established "substantial and justifiable reliance on a well-established agency interpretation" by the regulated community.  The MBA appealed, arguing that reliance could elevate an otherwise non-definitive interpretation into a definitive interpretation, but that it was not, as the DOL argued, a separate and independent requirement in determining whether notice and comment is required when an agency alters a previous regulatory interpretation.

Relying on Paralyzed Veterans of America v. D.C. Arena L.P., 117 F.3d 579 (D.C. Cir. 1997) and Alaska Professional Hunters Ass'n v. FAA, 177 F.3d 1030 (D.C. Cir. 1999), the Court of Appeals found that the DOL's reversal of position without first providing for public notice and comment was improper.  The court agreed with the MBA and rejected the DOL's argument that reliance was a separate and independent third requirement.  The court held that the analysis involved only two elements: a definitive interpretation and a significant change.  Reliance, the court held, was a factor to be considered in determining whether the agency's interpretation was definitive.  In other words, reliance may, in some circumstances, function as a "rough proxy" for definitiveness.

The Bottom Line: 

In addition to giving clarity to the financial sector regarding the exempt status of mortgage loan officers, the D.C. Circuit's ruling should curtail the DOL's and other regulatory agencies' ability to flip-flop on previously established positions taken by prior Presidential administrations.

Oregon Restaurant and Lodging Association v. Solis

The United States District Court for the District of Oregon invalidated WHD's 2011 FLSA regulations, 29 C.F.R. §§ 531.52, .54 and .59, which amended the previous regulations to prohibit employers from reaching agreements with their employees to allow the employer to retain all or some of the employee's tips and to prohibit tip pools that include non-tipped employees, even when the employer does not take a tip credit.  Oregon Restaurant and Lodging Assoc. v. Solis, No. 3:12-cv-01261, 2013 U.S. Dist. LEXIS 80396 (D. Or. June 7, 2013).

Section 203(m) of the FLSA allows employers of tipped employees to take a tip credit against the employer's minimum wage obligation if: (a) notice of the tip credit is provided, and (b) tipped employees are allowed to retain all of their tips, except in the case of tipped employees participating in a valid tip pool that only includes other tipped employees.  The DOL's 2011 Regulations provided that employers who do not take a tip credit pursuant to § 3(m) must pay their employees the full cash minimum wage, may not retain employees' tips, and may not require employees to participate in a tip pool that includes non-tipped employees.  The 2011 Regulations were a direct response to, and rejection of, the Ninth Circuit Court of Appeals' decision in Cumbie v. Woody Woo, 596 F.3d 577 (9th Cir. 2010), which held that Section 3(m) does not preclude employers who do not take a tip credit from maintaining a tip pool that includes non-tipped employees (e.g. cooks, dishwashers and other back of the house employees). 

In response to the April 2011 Regulation, the Oregon Restaurant and Lodging Association filed suit challenging the validity of the Regulations.  The Oregon District Court found that Section 3(m) of the FLSA was clear on its face that the prohibitions on retention of employee tips and the inclusion of non-tipped employees in tip pools only applied when the employer was taking a tip credit.  As observed by the court, § 3(m)'s requirement that employees retain all tips except in the case of valid tip pools is a condition of taking a tip credit and not a free-standing requirement pertaining to all tipped employees.  As explained by the court, "a statute that provides that a person must do ‘x' in order to achieve ‘y' does not mean that a person must do ‘x', period."  Thus, the court rejected the DOL's argument that the FLSA addresses only the use of tips in the case of employers who take a tip credit and is silent as to employers who do not take a tip credit, which according to the DOL allowed it to issue regulations filling in the gap left by the statute's silence.  The court, however, read the unambiguous text of § 3(m) not as silence, but as a clear expression of Congress' intent to only limit the use of tips by employers when a tip credit is taken.  In so doing, the court found that Congress could have explicitly stated that tips are the property of the employee in all cases if it had wanted to do so.  Moreover, the fact that at the time Congress enacted § 3(m), the Supreme Court had already held that private agreements between employers and employees addressing tip ownership were lawful, see Williams v. Jacksonville Terminal Co., 315 U.S. 386 (1942), suggests that Congress' failure to explicitly overturn that decision was deliberate. 

The Judgment issued by the court enjoins the DOL from enforcing the regulation as to the National Restaurant Association, the Washington Restaurant Association, the Oregon Restaurant Association, Alaska CHARR, and any member of one of those associations as of June 24, 2013.  If an employer can show membership in one of those associations as of June 24, 2013, it will be free from DOL enforcement of the invalidated portions of the regulation.  Such employers – or any other employer – doing business outside of Oregon will not, however, be free from private lawsuits on this issue, as this decision is only applicable in the state of Oregon, and courts outside of Oregon, particularly those outside the Ninth circuit, could reach a contrary conclusion.  It is likely that the DOL will appeal this decision to the Ninth Circuit.  Given the Ninth Circuit's decision in Woody Woo, the DOL may face an uphill battle on appeal.

The Bottom Line:  

This decision will likely be an important one for employers operating in states in the Ninth Circuit, particularly those that prohibit employers from taking a tip credit – i.e. Oregon, Washington, Montana, Nevada, Alaska, and California – as it will allow these employers to require tip sharing among tipped and non-tipped employees, which may aid in keeping labor costs down and fostering a team approach to good customer service.  As to employers in other states that were members of one of the above organizations as of June 24, 2013, they will receive relief from DOL enforcement of the invalidated regulation, but will need to remain mindful of the threat of a private lawsuit.  All other employers will be subject to DOL enforcement and private lawsuits.

If you have any questions regarding this Alert or other wage and hour issues, please contact the FordHarrison attorney with whom you usually work.