In Christopher v. SmithKline Beecham, a 5-4 decision announced yesterday afternoon, the U.S. Supreme Court ruled that pharmaceutical sales representatives are exempt from the overtime requirements of the federal Fair Labor Standards Act ("FLSA").
The FLSA requires employers to pay most employees 1 1/2 times their regular rate when they work more than 40 hours in a given workweek. However, an employer is not obligated to pay overtime to an individual whom it retains as an administrative employee, as an executive employee, or (relevant to this case) "in the capacity of outside salesman." The federal Department of Labor ("DOL"), which is charged with interpreting and enforcing the FLSA, has adopted an administrative regulation stating that the exemption only applies to employees whose "primary duty" is making sales. The law defines a "sale" to include any "sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition."
The case involved a group of pharmaceutical sales representatives who argued that SmithKline improperly classified them as outside salespeople and therefore denied them overtime wages. The DOL filed a brief supporting the sales representatives' position, arguing that because they were not responsible for actually transferring title to the prescription drugs (they instead were tasked with obtaining non-binding commitments from physicians to the effect that the physicians would prescribe SmithKline's drugs to their patients), they were not engaged in "sales" within the meaning of the law.
The Court disagreed. It concluded that the definition of "sale" in the statute was broad enough to cover transactions that did not involve a formal transfer of title. Further, and given the DOL's 70-year history of acquiescing to the pharmaceutical industry's treatment of its sales representatives as exempt, the Court determined that it was unfair of the DOL to announce its new interpretation for the first time in the brief it filed in support of the sales representatives. For that reason, the Court departed from its practice of deferring to the DOL's interpretation of the FLSA.
Because the outside sales exemption is relatively specialized, the Court's decision will have a limited impact on most businesses. However, if your business treats some of its employees as exempt from overtime, the case serves as a good reminder to reexamine their job duties to make sure that they satisfy the terms of the applicable exemption.