Worst Procedural Abuses of the Obama Era: Regulation by Guidance

Editor’s note: Open Market is publishing a new blog series this week on pressing issues in administrative law and regulatory policy, which we’ve titled “Worst Procedural Abuses of the Obama Era.” It will include contributions by Marc Scribner, Trey Kovacs (below), William Yeatman, and Ryan Radia.

Federal agencies are supposed to publish a notice of rulemaking, and allow the public time to comment on the rule, before it becomes final, or legally binding policy. This brings transparency to the regulatory process, provides a platform for impacted parties to air their grievances with the proposed rule, and notifies the regulated community of the change so that a rule is not dropped on them out of thin air.

However, as my colleague Wayne Crews testified before the U.S. Senate Homeland Security Regulatory oversight subcommittee recently, agencies frequently make use of so-called “guidance” documents in order to avoid the formal rulemaking process.

It is important to note that guidance is not considered legally binding, yet the regulated community must be aware of the standards. As Crews points out, “one ignores them [guidance] at peril.”

Of note, the Department of Labor’s (DOL) Wage and Hour Division (WHD) has taken a liking to regulation by guidance. One example, a recent Administrator’s Interpretation informed the public that far more employers are now considered joint employers with those they contract with and are deemed responsible for wage violations against employees they do not directly employ.

An area of concern, which undoubtedly would have been raised if the WHD had not subverted the rulemaking process, is the “agency's reliance on the economic realities test is not grounded in statutory or regulatory language and it is noticeably absent from the DOL's own regulations on joint employment.” This point is raised by Tammy McCutchen, former WHD Administrator.

Through guidance, the WHD has changed the test in which a joint employer relationship is established. That is a substantive policy change, not an interpretation, which should be required to go through the rulemaking process.

Guidance like the DOL’s does more than significantly change substantive policy. Unlike regulation, guidance is issued immediately with no time for the regulated community to achieve compliance. That is a big problem because the intent of the joint employer guidance as stated by the WHD Administrator David Weil:

Where joint employment exists, one employer may also be larger and more established, with a greater ability to implement policy or systemic changes to ensure compliance. Thus, WHD may consider joint employment to achieve statutory coverage, financial recovery, and future compliance, and to hold all responsible parties accountable for their legal obligations.

With an objective to hold large employers financially responsible for wage violations committed by smaller employers, an employer needs time to examine its contracts and business practices. By issuing guidance, the DOL does not give companies time to familiarize themselves with the new policy.

As previously remarked, guidance is non-binding. However, as the late George Mason University law professor Robert Anthony explained, guidance binds “as a practical matter” and “failure to conform will bring adverse consequences, such as an enforcement action or denial of an application.”

As shown above, the DOL has explicitly stated it plans on using its new joint employer interpretative guidance when taking enforcement action. To avoid future legal obligations and DOL investigation, a company must abide by the new joint employer standard issued via guidance or risk being held financially liable for legal obligations of another company and responsible in the future for compliance of other companies. 

While Congress may not be able to stop DOL’s guidance during this session of Congress, regulation by guidance is something they need to keep an eye on. That said, a lawsuit may be the best path to travel; since DOL’s guidance functions like a rule, a court may view it as a rule and require it go through the proper rulemaking process.