On June 18, 2012, the Supreme Court held in Christopher v. SmithKline Beecham Corp.1 that pharmaceutical sales representatives, also known as detailers, were properly classified as outside salespeople and thus exempt from the Fair Labor Standard Act’s (FLSA) overtime pay requirements. The holding resolved a split of opinion that had arisen in several federal circuit courts of appeals.
Under existing U.S. Department of Labor (DOL) regulations, an outside sales employee is defined, in part, as an employee whose “primary duty is…making sales.”2 The FLSA defines “sale” or “sell” to include “any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.”3 Pharmaceutical sales representatives do not make sales in the traditional sense, because prescription drugs can only be sold with a prescription from a health care provider. Instead, the sales representatives market their products to physicians with the goal of obtaining non-binding commitments from them to write prescriptions for the pharmaceutical company’s products when appropriate. Despite this unique system, pharmaceutical sales representatives have traditionally been treated as exempt under the outside sales employee exemption.
However, in a 2010 decision, In re Novartis Wage and Hour Litigation,4 the Second Circuit deferred to the DOL’s position, set forth for the first time in an amicus brief, that “sale” meant a “consummated transaction directly involving the employee for whom the exemption is sought.” Based on this interpretation, the Second Circuit held that pharmaceutical sales representatives did not fall under the outside sales exemption. Although the DOL advanced the same position in its amicus brief to the Ninth Circuit Court of Appeals in Christopher, the Ninth Circuit refused to give deference to the DOL’s interpretation and found that the sales representatives were exempt as outside salespeople.5 The Supreme Court granted certiorari in Christopher to resolve the Circuit split.
In Christopher, the Supreme Court performed a functional, rather than formal, inquiry and held that pharmaceutical sales representatives fall under the outside sales exemption based on the broad definition of the term “sale” in the FLSA. The Court refused to give deference to the DOL’s interpretation — that a sale requires transfer of title — which was advanced for the first time in the DOL’s amicus brief to the Supreme Court. The Court noted that although agency interpretations of their regulations are normally given deference — even when such interpretations are made in amicus briefs rather than formal regulations — this deference is not due when the agency advances a novel interpretation that was not subject to public comment and the scrutiny of the typical regulatory process, and that would cause “unfair surprise” in the regulated industry. Here, accepting the DOL’s interpretation would impose “massive liability” on the pharmaceutical industry for conduct that occurred well before the DOL advanced its new interpretation of the outside sales exemption, and that had not previously been challenged by the DOL over a period of more than 70 years. The Court’s refusal to give deference to the DOL’s proffered interpretation was also based on the fact that the DOL’s interpretation had changed between its earlier amicus briefs in the lower courts and its argument before the Supreme Court. Moreover, the Court found that the DOL’s interpretation was inconsistent with the FLSA, which broadly defined sales.
The Christopher decision may have several implications that apply more broadly than the pharmaceutical industry. First, the Supreme Court’s broad interpretation of the outside sales exemption and its focus on the functional aspects of the sales position in question rather than formalities could provide support for application of the outside sales exemption to salespeople in other industries that have a non-traditional sales process. Second, the Court’s rejection of the DOL’s informal attempt to bring about major regulatory shifts through amicus briefs rather than the formal regulatory process could dampen such attempts in the future, and in any event provides employers with an additional weapon for challenging such actions in the future.
Finally, and perhaps most importantly, the Court’s overall approach to analyzing the exemption at issue in Christopher has the potential to begin a shift in the way that lower courts assess FLSA exemption cases going forward. Notably, Christopher represents the first time that the Supreme Court has weighed in on any of the so-called white collar exemptions under the FLSA, and for this reason, it could have an impact on lower court decisions beyond outside sales exemption cases. Rather than adhering to the traditional approach that FLSA exemptions are to be construed narrowly, the Christopher Court employed a more practical analysis of the exemption issues that avoided emphasis on technicalities. Furthermore, the Court supported its holding by looking to the overall purpose of the FLSA and concluding that the plaintiff employees in question — “each of whom earned an average of more than $70,000 per year and spent between 10 and 20 hours outside normal business hours each week performing work related to his assigned portfolio of drugs in his assigned sales territory” — were “hardly the kind of employees that the FLSA was intended to protect.” This more practical approach to analyzing the applicability of the FLSA’s white collar exemptions could lead lower courts to adopt a similar, more employer-friendly approach in the future, though the full impact of the Court’s decision will not be fully understood until the lower courts actually begin to assess and cite Christopher in future FLSA exemption cases.