Companies subject to federal agency regulations sometimes face situations where measures taken to comply with such rules work one day, and then result in violations of those rules the next. Federal administrative agencies have the irritating habit of deciding what was allowed under their regulations was based on an incorrect interpretation of those rules. Often, these changes follow a change in the political affiliation of the president who oversees the agency.

In response to this seesaw approach toward rule interpretation, companies have sued federal agencies, claiming that they cannot change binding interpretations of their regulations without going through the formal notice and comment period required for new regulations. The most recent of these suits involved an interpretation by the Department of Labor of the applicability of the FLSA’s Administrative overtime exemption to mortgage brokers.

For years, the brokers were considered non-exempt, meaning they were entitled to overtime pay. In 2006, the Bush administration issued a formal interpretation of the exemption, concluding that mortgage brokers fell within the Administrative exemption.  In 2010, the Obama administration’s DOL withdrew this opinion, informing employers that the brokers were again considered non-exempt employees subject to the FLSA’s overtime provisions.

Bank advocates sued DOL, claiming that it could not reverse this interpretation without going through the formal notice and comment process. Last week in a unanimous decision, the U.S. Supreme Court disagreed, upholding the agency’s ability to interpret rules without following formal rulemaking procedures. In its opinion in Perez v. Mortgage Bankers Ass’n., the Court concluded that the Administrative Procedure Act does not require notice and comment when an administrative agency reverses its rule interpretation.

Where does this decision leave the regulated community? The Court stated that employers or other affected entities can still legally challenge the changed interpretation as arbitrary and capricious, or inconsistent with the underlying statute or regulation. The Court also signaled that lower courts reviewing the rule interpretation are not required to grant the agency unfettered discretion in interpreting its rules, especially when the agency repeatedly changes its mind. Several concurring justices took this point further, arguing that federal agencies should enjoy no deference when interpreting their regulations.

While this decision removes an absolute procedural defense to changed rule interpretations, employers still have substantive grounds to challenge the interpretation itself. This avenue may require more work and expense, but it requires the agencies to justify the logic and consistency of the new interpretation with their governing statutes.