On June 18, 2012, the United States Supreme Court held in Christopher et al. v. GlaxoSmithKline Beecham Corp., d/b/a Glaxosmithkline, No. 11-204, that the Fair Labor Standards Act’s “outside sales” exemption applies to “pharmaceutical sales representatives” (PSRs) whose primary duty is “to obtain nonbinding commitments from physicians to prescribe their employer’s prescription drugs in appropriate cases.” The decision resolved a split between the Ninth Circuit, which found the PSRs to be exempt outside salespersons, and a contrary 2009 decision in the Second Circuit.

There are two significant take-aways from the Court’s decision. First, the Court held that whether an employee is an outside salesperson is considered from a functional approach: is the employee’s function to achieve the sale of their employer’s products or services in the manner allowed in that industry, regardless of whether the employee actually consummates a transfer of property? Second, regulatory agencies that deviate from long-established interpretations of statutes and regulations with little or no notice will not likely be given any deference by a court.

Background

The Fair Labor Standards Act (FLSA) generally requires employers to pay their employees overtime wages of not less than one-and-one-half times their regular hourly rate for all hours worked over 40 in each workweek. 29 U.S.C. § 207(a)(1). This requirement does not apply, however, to workers employed “in the capacity of outside salesman.” 29 U.S.C. § 213(a)(1). Congress delegated to the Department of Labor (DOL) responsibility for issuing regulations defining the term “outside salesman.” The relevant regulations are found at 29 CFR § 541.500(a)(1)-(2), 29 CFR § 541.501(b), and 29 CFR § 541.503(a). Specifically, the term “sales” is defined in section 3(k) of the FLSA to include “any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.” 29 U.S.C. § 3(k) (emphasis added).

Federal law prohibits pharmaceutical companies from selling prescription products directly to its ultimate users - patients. Rather, pharmaceutical companies sell their prescription drug products to distributors or pharmacies. Physicians write prescriptions that allow patients to purchase the drugs.

GlaxoSmithKline and other pharmaceutical companies employ thousands of PSRs to encourage physicians to prescribe their products when appropriate. PSRs make “calls” on physicians to obtain nonbinding commitments from physicians to prescribe the respective companies’ products to their patients. The job responsibilities of PSRs include building business relationships with physicians, responding to their concerns and recruiting them to attend organized events sponsored by the PSRs’ employer. PSRs work primarily outside of their employers’ offices and spend the majority of their time traveling to physicians’ offices in their assigned geographic territories.

PSRs are provided with relatively small sample amounts of their employer’s products to distribute to physicians. Federal law prohibits PSRs from selling samples, taking any orders for medication or negotiating drug process or contracts with either the physicians or the patients.

PSRs employed by various pharmaceutical companies around the country have sued, alleging that they are not “outside salesmen” exempt from overtime and that they are entitled to overtime compensation. In recent years, the federal Department of Labor has for the first time taken the position in litigation that PSRs are not exempt. Courts have reached differing conclusions about whether PSRs are exempt outside salesmen; the Supreme Court agreed to hear the GlaxoSmithKline case to resolve the issue.

The Supreme Court’s Decision

In a 5-4 decision, the Supreme Court held that PSRs are exempt outside salesmen “as the DOL has defined that term in its regulations.” The Court stated that it is required to “defer,” or give controlling weight to, the DOL’s regulations defining who is an exempt outside salesman. But the question here involved the interpretation of the DOL’s regulations. The Court found “strong reasons” for withholding deference to the DOL’s “interpretation” of those regulations in this case - even though such deference ordinarily applies “to an agency’s interpretation of its own regulations, even when that interpretation is advanced in a legal brief.”

The Court noted DOL did not announce its view that PSRs are not exempt outside salesmen until 2009, when filing its amicus brief in a case before the Second Circuit. In that brief, the DOL interpreted a “sale” to require “a consummated transaction directly involving the employee for whom the exemption is sought.” Then, after the Court granted certiorari in the GlaxoSmithKline case, DOL submitted an amicus brief taking the position that a “sale” only occurs if the employee “actually transfers title to the property at issue.”

The Court cited the principle that agencies should provide “fair warning” of conduct their regulations prohibit or require and explained how the PSRs requested deference to the DOL’s recently announced interpretations would undermine this principle. The Court noted that, before the DOL’s 2009 amicus brief in the Second Circuit case, the pharmaceutical industry “had little reason to suspect that [the industry’s] longstanding practice of treating [PSR’s] as exempt outside salesmen” violated the FLSA. The Court further found the DOL had, until 2009, acquiesced in this reasonable interpretation by failing to initiate any enforcement actions, even though the function and duties of PSRs had not materially changed over the “decades” during which the pharmaceutical industry openly treated PSRs as exempt outside salesmen. Accordingly, the Court essentially concluded it would be unfair to defer to the DOL’s newly announced interpretation and then expose pharmaceutical companies to “potentially massive liability” for conduct predating that interpretation.

The Court further found the DOL’s interpretation to be “quite unpersuasive” and lacking “the hallmarks of thorough consideration.” The Court went so far as to find the DOL’s interpretation - that a sale demands a transfer of title - to be “flatly inconsistent with the FLSA.” Accordingly, the Court disregarded the DOL’s interpretations.

Given the unique regulatory environment of the pharmaceutical industry, the Court found the nonbinding commitment PSRs seek from physicians is “the most [PSRs] were able to do to ensure the eventual disposition of the products [GlaxoSmithKline] sells.” The Court found “this kind of arrangement ... comfortably falls within [the FLSA’s] catchall category of “other disposition.” Accordingly, the Supreme Court held GlaxoSmithKline’s PSRs “made sales for purposes of the FLSA and therefore are exempt outside salespersons within the meaning of the DOL’s regulations.” The Court further noted this holding is consistent with the purpose of the exemption, which is based on the premise that exempt employees usually earn salaries well above minimum wage and perform work difficult to standardize to any time frame and not easily spread to other workers - thereby generally precluding the potential job expansion intended by the FLSA’s overtime penalty.

The Ruling’s Importance to Employers

The Court’s decision in Christopher conclusively resolves the issue of whether PSRs are exempt from the FLSA’s overtime requirements as outside salespersons. But its broader significance lies in its use of a functional approach to who qualifies as an outside salesperson. The Court recognized that context matters and one needs to look at the industry in which the employee operates as well as the primary functions or job duties that employee is being paid to perform. Also of importance to employers is that they can take solace in the Court’s rejection of the DOL’s “about face” in its interpretation of its regulations. This should send a message to all regulatory agencies that if they are going to change their views of the law or their regulations, they must give fair warning and be able to demonstrate their reasoning for the change.