Pharmaceutical companies scored a major victory this week when a divided Supreme Court held that the industry’s sales representatives are not eligible for overtime pay.

On June 18, 2012 the Supreme Court ruled that pharmaceutical detailers, also known as “pharmaceutical sales representatives” or “drug reps,” are considered “outside salesman” under the Fair Labor Standards Act (“FLSA”), and therefore are not eligible for overtime pay. On June 18, 2012, the Supreme Court held in Christopher v. SmithKline Beecham Corporation , in a 5-4 decision with Justice Alito delivering the majority opinion, that “Petitioners qualify as outside salesmen under the most reasonable interpretation of the DOL’s regulations.” More specifically, the Court concluded that petitioners Michael Christopher and Frank Buchanan, who were hired at SmithKline Beecham Corp. in 2003 had worked as outside salesmen when they sought non-binding informal commitments from physicians to prescribe prescription medications sold by their company.

The FLSA requires employers to pay employees overtime wages, but does not extend this requirement to those employed “in the capacity of outside salesmen.” According to the Court, Congress did not elaborate on the meaning of “outside salesmen,” but instead delegated authority to the Department of Labor (“DOL”) to issue regulations to define the term.

Justice Alito completely dismissed the DOL’s interpretation of “outside salesman,” denying it deference in the interpretation of the provision. Instead, the Court relied upon the “traditional tools of interpretation” and concluded that a functional analysis of an employee’s role, not a formalistic one, should be used. The Court considered the DOL’s regulations for further guidance, noting Section 541.500 which adopts the statutory definition of “sale” and defines “outside salesman”, as an employee whose primary duty is “making sales.”

According to Justice Alito, three textual clues exist within the statutory definition of “sale.” First, the word “includes” demonstrates the definition is illustrative, not exhaustive. Second, the list of transactions included in the statutory definition uses the term “any,” another word that encourages expansive and inclusive interpretation. Finally, the definition included the broad phrase “other disposition” which requires the most reasonable interpretation to include “those arrangements that are tantamount, in a particular industry, to a paradigmatic sale of a commodity.” Accordingly the routine solicitation of physicians and health professionals to make nonbinding commitments to prescribe drugs falls comfortably within the catch-all category of “other disposition” in the context of the highly regulated pharmaceutical industry.

Why Did the Court Reject the Department of Labor’s Interpretation?

The Court provided several reasons for rejecting the Department’s interpretation of its own regulation, an interpretation that usually would receive controlling deference. The DOL filed an amicus brief in two circuits stating that “a sale for the purpose of the outside sales exemption requires a consummated transaction directly involving the employee for whom the exemption is sought.” The DOL later changed its own position, asserting that “an employee does not make a ‘sale’… unless he actually transfers title to the property at issue.” The Court disagreed, and concluded that employees who spend their workday preparing for or promoting such transactions could be considered “outside salesmen” even if they do not carry out the transaction to completion.

In rejecting the DOL’s latter interpretation, the Supreme Court determined that it did not deserve deference because of the effect it would have on the industry and because of it’s inconsistency with the FLSA. First, ruling in favor of the Petitioners and accepting the DOL’s construction would unfairly surprised the industry’s employers by requiring retribution for conduct performed long before the interpretation had been provided. Second, the court questioned the DOL’s inaction and characterized it as acquiescence with the status quo. For almost seventy years, the DOL was silent on this issue only offering an interpretation within the last decade. Finally, the Court concluded that the DOL’s interpretation as “not thoughtful and flatly inconsistent with the FLSA.” The statute defines sale to mean a “consignment for sale.” A “consignment for sale” does not necessarily include a transfer of title; it simply provides that this transaction is included within the term “sale.”

What Does This Mean and What Should You Know?

Employers, particularly pharmaceutical companies, should be encouraged by this decision. Under the Christopher ruling, the definition of “outside salesman” is both broad and industry-specific. This expansive and inclusive interpretation is focused primarily on the function and responsibilities of employees and less on their titles with outdated notions of “sales” or “salesmen.” Further, the opinion sends a clear message to the DOL that retroactive interpretations of its regulations fashioned without notice or input from those subject to the regulations should be carefully scrutinized by the courts.

Employers should consider the intent behind the FLSA exemption in anticipating its impact on their employees: to exempt employees who earn well above minimum wage and who enjoy other benefits that “set them apart from the nonexempt workers entitled to overtime pay.” Exempt employees normally perform the kind of work that is hard to conform to a particular time frame or schedule. For example, drug representatives earn on average $70,000 a year and spend 10-20 hours a week performing job functions outside of normal business hours. Modifying these positions to account for overtime pay would be over burdensome.

Tens of thousands of the drug industry’s sales representatives now fit within the definition of an “outside salesman” under the FLSA. In the aftermath of this decision, we expect to see many pending lawsuits against pharmaceutical companies either dismissed or settled under favorable terms for the employers. This decision also could have ramifications for other industries, such as the insurance and non-profit sectors,  that employ people who perform the type of promotional activities that do not necessarily result in discrete “consummated transactions” as discussed in the majority opinion.