November 11, 2015 6:01PM

“Underground Regulations” Violate the Constitution as Much as Headline‐​Grabbing Executive Actions

Small business owners aren't typically lawyers, though they are undoubtedly familiar with the thousands of inscrutable pages of new regulations published every year in the Federal Register. Instead of devoting their energies to growing their businesses, owners must expend significant time and resources ensuring compliance with these voluminous and often vague regulations, with costly fines looming as consequences for failure to comply. “The Fourth Branch & Underground Regulations,” a new report by the National Federation of Independent Businesses (NFIB), details the processes by which administrative agencies skirt “notice-and-comment” requirements to impose new interpretations of rules that avoid the constitutional system of checks and balances. Unfortunately, operating on this shifting field disproportionately affects small businesses, as they are most poorly equipped to lobby for favorable rules.

The Administrative Procedure Act established “notice-and-comment” as a means for regulated businesses to voice concerns with or offer suggestions to improve proposed regulations. However, “non-legislative rules,” or “general statements of policy” and “interpretive rules,” are not required to undergo this process. This grants administrative agencies – the “Fourth Branch” of government – significant leeway in how “legislative rules” are interpreted and implemented, essentially giving them law making power. The recent Supreme Court ruling in Perez v. Mortgage Bankers Association allows agencies not only to interpret rules without undergoing “notice-and-comment,” but also the ability to change their interpretation at any point. (Cato filed an amicus brief in the case.)

Without a required need for transparency, agencies are thus free to issue “underground regulations” that impose serious and sudden rules on regulated businesses. NFIB examines four ways in which these “underground rules” are established: executive orders, guidance documents, amicus filings, and enforcement actions. Recognizing the potential dangers of this “underground” system of lawmaking, NFIB argues that “the regulated public should have a right to voice concerns over any newly announced rules, policy, or administrative interpretation of law that may impose affirmative regulatory burdens on individuals or businesses” and urges agencies to “allows some opportunity for notice-and-comment on all new rules imposing liabilities or other regulatory burdens – without regard to quantifiable compliance costs.”

Freed from congressional oversight and the beneficiary of considerable judicial deference, administrative agencies can pursue ideological agendas without the general public even being aware regulations are being instituted. One way this is achieved is by filing an amicus brief in a case between two private parties. An agency can offer the court its authoritative interpretation of a rule -- though given the ruling in Perez, the agency can change that interpretation in a later brief in another case or court.

For example, NFIB’s report details the process by which the National Labor Relations Board (NLRB) reclassified McDonalds as a joint-employer with it franchisees, upending the franchise model and thirty years of established rules. In a June 2014 amicus brief, the NLRB announced it’s plans to reinterpret its “joint-employer” rule to “treat franchisors as joint-employers with franchisees, or other independent contracting firms, so long as they exert ‘significant control’ over the same employees.” The NLRB further announced that significant control could be shown “simply by demonstrating that a franchisor has significant control over every-day business operations, without regard to whether the franchisor has exercised any control over personnel decisions.” Under previous rules, influence over personnel decisions dictated whether franchisors were considered “joint-employers,” so given McDonalds franchisees had control over hiring and disciplinary practices, McDonalds was not considered a joint-employer.

Following this amicus brief, the NLRB filed thirteen complaints – enforcement actions – against McDonalds, alleging misconduct on the part of some of it franchisees, presenting McDonalds with a choice: loosen quality control over its franchisees (and thus risk brand degradation) or radically alter its business model and become more involved in the personnel decisions of its franchisees. While McDonalds might not be the most sympathetic victim of underground rule making, the rule change also affects its franchisees, “threaten[ing] a successful collaborative business model that has enabled many entrepreneurs to launch their own business.”

Readers of this blog will be familiar with ongoing litigation over the current administration’s use of executive actions to pursue its immigration policy and EPA rule-making to further its climate agenda -- let alone the ongoing dispute between the House of Representatives and the president over the implementation of the Affordable Care Act -- but NFIB’s report offers numerous examples of how “underground regulation” affects businesses of all sizes in ways that don't gain media attention. 

Research assistant Anthony Gruzdis contributed to this blogpost.