In a case that could impact employers beyond the pharmaceutical industry, the U.S. Supreme Court ruled on June 18, 2012, that sales representatives for drug companies meet the "outside sales exemption" under federal law and are therefore not entitled to overtime pay. By a 5-4 vote in Christopher v. SmithKline Beecham Corp., No. 11-204, the Court also held that the recent interpretation by the U.S. Department of Labor (DOL) of its outside sales representative regulations was an "unfair surprise" to employers, wrong and not entitled to deference.
For employers who have experienced the DOL providing no deference to them, there was likely some pleasure in seeing the DOL receive that same lack of deference. However, this case, while helpful, does not provide as much comfort or protection as some have suggested.
Federal law prohibits anyone but a pharmacist from actually selling prescription drugs to consumers. In light of this ban, pharmaceutical companies focus their direct marketing efforts on physicians. Pharmaceutical sales representatives (PSRs) promote their employer's products by trying to persuade physicians to write prescriptions for the products. The primary objective is therefore to obtain a "nonbinding commitment" from physicians to prescribe certain drugs in appropriate cases.
The plaintiffs, who performed these job duties at SmithKline Beecham Corp. d/b/a GlaxoSmithKline (Glaxo), typically spent 40 hours in the field each week calling on physicians and an additional 10 to 20 hours attending events and performing other miscellaneous tasks. They each earned on average more than $70,000 per year, which included both a base salary and incentive pay. The PSRs filed suit, alleging that Glaxo violated the federal Fair Labor Standards Act (FLSA) by failing to pay them for overtime (more than 40 hours per week).
The FLSA requires employers to pay employees overtime wages, but this requirement does not apply with respect to workers employed "in the capacity of outside salesman." The DOL has issued regulations to define "outside salesman" and "sales."
The plaintiffs contended that they did not qualify for the outside salespeople exemption because they are not salespeople. They promoted products but could not lawfully make a sale by taking an order for purchase of a pharmaceutical product. The DOL filed a friend-of-the-court—or amicus—brief supporting the plaintiffs' position that PSRs are not salespeople and should not be exempt from the FLSA overtime rules. The district and appellate courts disagreed with the plaintiffs and the DOL, concluding that Glaxo's PSRs were exempt from overtime pay.
Supreme Court's Holding
The Supreme Court concluded that Glaxo properly classified its PSRs as exempt. In doing so, the Court took a practical approach. The wording of the FLSA supports a "functional, rather than a formal, inquiry" that considers an employee’s responsibilities in the context of the particular industry in which the employee works. Obtaining a nonbinding commitment from a physician to prescribe certain drugs is the "most that petitioners were able to do to" to make a sale within the "unique regulatory environment within which pharmaceutical companies must operate." An employee who functions in all relevant respects as an outside salesperson, the Court reasoned, should not be excluded from that category based on technicalities.
The purpose of the FLSA also weighs in favor of finding PSRs exempt. The outside sales exemption is meant to cover employees who typically earn salaries well above minimum wage and who enjoy other benefits that set them apart from nonexempt workers. Per the Court, highly paid and independent sales representatives "are hardly the kind of employees that the FLSA was intended to protect." From an administrative perspective, companies would also be forced to significantly change the nature of the PSR position in order to comply with the overtime law.
Interestingly, the Court rejected the DOL's interpretation of its own regulations. It deemed the DOL's view of the outside sales exemption "flatly inconsistent" with the FLSA, as the definition of the word "sale" in the FLSA is broad and does not require a transfer of title to tangible property. Also, the DOL's position, offered for the first time during recent litigation, created an "unfair surprise" for the pharmaceutical industry. The DOL had never initiated any enforcement actions or otherwise suggested that it thought the industry was acting unlawfully. Per the Court, employers should have been given notice or a chance to comment on the new interpretation through the rulemaking process.
What This Means for Employers
This case clarifies the applicability of the FLSA's outside sales exemption. The ruling does not, however, create a per se rule for all PSRs. Whether an employee actually falls under this exemption will depend on the specific facts and circumstances of each case. The plaintiffs in Christopher, for example, were paid well for their work, which they performed with minimal supervision and great discretion.
This case also illustrates the limits of administrative interpretation: Courts will not necessarily defer to the opinion of a federal agency, unless the agency went through the required rulemaking process. The Court's decision in Christopher could cause courts to reconsider a wide variety of issues where the DOL submitted briefing or set forth comments to existing guidelines that articulated a new position or a position contrary to the FLSA text, longstanding court precedent or the DOL's own enforcement history.
Employers should remain alert. While Christopher may prompt courts to interpret the FLSA's outside sales exemption more broadly, the DOL is unlikely to become less aggressive. In its enforcement efforts, the DOL may proceed as though Christopher has little to no implication beyond the position at issue. While Christopher may provide employers with additional means to defend against extreme DOL positions in court, employers would still need to get to court to use them. These cases are expensive to litigate, so even the victories are somewhat pyrrhic.
Finally, states may offer greater overtime pay protections than federal law. Thus, an employee who is exempt under the FLSA may not be exempt under state law. Companies that employ outside sales representatives should therefore ensure compliance with state and federal laws. Of course, this would be true of all positions.