MEMORANDUM*

Maya Lapsley appealed to the district court the decision of the Secretary of Health and Human Services denying his application for disability benefits. The district court addressed three issues raised by Lapsley, and affirmed the Secretary's order.

We reverse and remand for further proceedings.

We need not here restate the facts or outline the Social Security Act and its shifting of burdens; we cannot improve on the concise yet thorough discussion contained in the district court order. We address three issues that were dealt with by the district court and one that was not.

The first issue discussed by the district court was whether the Secretary erred in rejecting Dr. Tatro's testimony. At oral argument, Lapsley's attorney urged us to hold that because Dr. Tatro's testimony was uncontroverted, the Secretary was not free to disregard or discount that testimony. We reject this argument for two reasons. First, Dr. Tatro was not the treating physician, in which case the Secretary would be required to give greater deference to his testimony. See Rodriguez v. Bowen, 876 F.2d 759, 761 (9th Cir.1989) ("The medical opinion of a claimant's treating physician is entitled to 'special weight' "). Lapsley's attorney hired Dr. Tatro to evaluate Lapsley two days after the administrative hearing. Second, as the district court pointed out, Dr. Tatro's testimony was not uncontroverted. Dr. Tatro's opinion of total disability was inconsistent with the findings made in psychiatric evaluations in May 1985, in notes from the Community Mental Health Center in May 1986, and in a psychiatric evaluation by Dr. Bonfield in July 1986. Thus, the Secretary did not err in discounting Dr. Tatro's testimony.

The district court next addressed whether the finding of only a moderately limiting mental impairment in the ALJ's Psychiatric Review Technique Form was supported by substantial evidence.1 We agree with the district court that the various medical reports mentioned above, as well as Lapsley's own testimony about his daily activities, serve as support for a finding of "moderate mental impairment." As both the Appeals Council and the ALJ recognized, however, Lapsley has an "inability to tolerate frequent interpersonal contact."

Finally, the district court discussed whether the Appeals Council erred in expanding the issues it reviewed beyond the issue appealed by Lapsley without giving proper notice. On appeal to this court, Lapsley recasts this issue as whether the Appeals Council's revision of the ALJ's determination of Lapsley's residual functional capacity was supported by substantial evidence.2 We agree with the district court that the Appeals Council's modification of the ALJ's decision was permitted by Federal Regulations, see C.F.R. Secs. 404.979 & 416.1479 ("The Appeals Council may affirm, modify or reverse the administrative law judge hearing decision or it may adopt, modify or reject a recommended decision"), and by case law. See Razey v. Heckler, 785 F.2d 1426, 1430, amended, 794 F.2d 1348 (9th Cir.1986) (it was within the Appeals Council's discretion to interpret the evidence differently than did the ALJ). Moreover, we agree with the district court that the Appeals Council's interpretation of the evidence, that Lapsley's residual functional capacity permitted him to engage in light work, was supported by substantial evidence.3

The district court did not address a fourth issue raised by Lapsley.4 We address that issue now. Lapsley contends that the Secretary should not have relied on the Medical-Vocational Guidelines (the grids), see 20 C.F.R. Pt. 404, Subpt. P, App. 2 (1985),5 in determining that a significant number of jobs exist in the national economy which Lapsley can perform, because Lapsley alleged a nonexertional limitation. Lapsley further contends that, if the Secretary instead relied on the vocational expert's testimony, this too was an error because the hypothetical the ALJ posed to the vocational expert did not take into consideration all of Lapsley's limitations. The Secretary, on the other hand, argues that he properly relied on the grids rather than on the vocational expert in determining the availability of other work; the vocational expert's testimony was merely other evidence, rather than the basis for his decision.

The regulations do not automatically preclude the use of the grids when a nonexertional limitation is alleged. Heckler v. Campbell, 461 U.S. 458 (1983); Razey v. Heckler, 785 F.2d 1426, 1430 (9th Cir.1986) (citing 20 C.F.R. Pt. 404, Subpt. P, App. 2 Sec. 200.00(e) (1985)). However, before applying the grids, the Secretary must first determine whether the claimant's nonexertional limitation significantly limits the range of work permitted by his exertional capabilities. Razey v. Heckler, 785 F.2d at 1430; Blacknall v. Heckler, 721 F.2d 1179, 1181 (9th Cir.1983); Odle v. Heckler, 707 F.2d 439, 440 (9th Cir.1983). The Secretary, in this case, attempted to follow this directive in assessing Lapsley's disability claim. The Secretary stated at page two of his decision that Lapsley's "inability to tolerate frequent interpersonal contact would not significantly affect his capacity to work at that level [light work]." In spite of this clear statement, the Secretary, in his enumeration of findings of the Appeals Council, stated at number twelve: "Although the claimant's additional nonexertional limitations do not allow him to perform the full range of light work...." This finding contradicts the Secretary's earlier assertion and indicates to us that use of the grids was inappropriate in this case. See Desrosiers v. Secretary of Health & Human Servs., 846 F.2d 573, 579 (9th Cir.1988) (Pregerson, J., concurring).

Where use of the grids is inappropriate, the Secretary is required to call a vocational expert and hear testimony as to the number of jobs in the national economy that the claimant is capable of performing. Id. at 580 (citing Kail v. Heckler, 722 F.2d 1496, 1498 (9th Cir.1984)). If the number is significant, the Secretary is justified in finding that the claimant is "not disabled." Id. Here the Secretary admits that, although a vocational expert testified, the Secretary did not base his finding of "not disabled" on that testimony. The Secretary erred in failing to rely on expert testimony, and in relying on the grids instead. See Desrosiers, 846 F.2d at 579.

As the record now stands, the vocational expert's testimony cannot properly serve as a basis for finding Lapsley "not disabled." In posing a hypothetical question, the ALJ asked the vocational expert:

Now if I could find that the claimant is able to perform light and sedentary work, is there work of an unskilled nature that he could perform considering his age, education, and experience?

This question failed to mention Lapsley's inability to tolerate interpersonal contact. Because the hypothetical question posed to the expert failed to set out all of Lapsley's limitations and restrictions, the expert's testimony cannot serve as an evidentiary basis for a determination of disability. See Embrey v. Bowen, 849 F.2d 418, 422-23 (9th Cir.1988).6

This determination requires that we reverse and remand with instructions to the Secretary for further proceedings to determine whether jobs exist in substantial numbers in the economy that Lapsley, with all of his limitations, could perform.

REVERSED and REMANDED.