The Ninth Circuit Court of Appeals, affirming a decision of the U.S. District Court for the District of Arizona, has ruled that Pharmaceutical Sales Representatives (PSRs) who visit physicians and urge them to prescribe the prescription drugs of their employers, where appropriate, are within the "outside sales" exemption to the Fair Labor Standards Act, and therefore not entitled to overtime pay. Christopher v. SmithKline Beecham Corp, d/b/a GlaxoSmithKline, Case No. 10-15257 (9th Cir. February 14, 2011). This decision creates a conflict in the circuits on the question, as the Glaxo case rejects the Second Circuit's holding on the same question, In re Novartis Wage & Hour Litig., 611 F.3d 141 (2d Cir. 2010). But the Glaxo decision has significance beyond the pharmaceutical industry, as it represents a major defeat for the Department of Labor and the agency's interpretations of the "outside sales" exemption.

The FLSA exempts from its overtime pay and minimum wage requirements employees engaged in "outside sales." 29 U.S.C. § 213(a)(1) (exemptions for ". . . any employee employed in a bona fide executive, administrative, or professional capacity . . . or in the capacity of outside salesman (as such terms are defined or delimited from time to time by regulations of the Secretary. . . .") (emphasis added).

To qualify for the exemption, (a) the employee must be customarily and regularly engaged away from the employer's places of business, and (b) the employee's primary duty must be "making sales," or "obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer." 29 C.F.R. §§ 541.501 & .502. "Making sales" is not restricted to an employee's purest acts of soliciting sales with customers and potential customers. Work that an employee performs incidental to and in conjunction with his or her sales effort is exempt work. 29 C.F.R. § 541.500(b). Notably, however, the DOL has long distinguished between "promotion work" performed by an employee incidental to and in conjunction with the employee's own outside sales, which is exempt, and "promotion work" that is incidental to sales made or to be made by others, which is not exempt. 29 C.F.R. § 541.503(a).

Drug companies, of course, are prohibited from selling prescription medications directly to the ultimate-users, the patients. Instead, a physician must write a prescription for a patient's use of such medications. The PSRs in Glaxo visited eight to ten physicians a day, usually during office hours. The PSRs delivered small amounts of sample products to the doctors, identifying when the medication should be used and the beneficial features of the medication. At the end of each visit, a PSR would seek a non-binding commitment from the doctor to prescribe the PSR's assigned product. About 10-20 hours each week, the PSRs also worked outside normal business hours, studying products, answering phone calls, checking e-mail, generating reports, etc.

The PSRs were paid a salary and incentive-based compensation, the latter tied to increases in 1) market share for a product in the PSR's territory, 2) sales volume for a product, 3) sales revenue, or 4) dose volume. Glaxo sought to have 75 percent of a PSR's compensation be salary, and 25 percent incentive compensation.

As noted above, the Secretary of Labor has the authority to "define" or "delimit" the term "outside salesman." In the Novartis case, the Department of Labor filed an amicus curiae brief arguing that - in its opinion - PSRs were not outside salespersons because they do not make sales to customers, but merely obtain non-binding commitments from doctors. In the DOL's view, the PSRs basically are promoters of others' sales of their companies' products, and as such, are non-exempt. The Second Circuit deferred greatly to the DOL's position when making its decision.

The Ninth Circuit decided the Secretary of Labor's position in Novartis was not entitled to any deference whatsoever for three major reasons. First, the DOL's position was deemed a mere paraphrase of the statutory language, not worthy of special deference. Second, the DOL's position was not declared in advance, in a promulgated regulation, or in a rule implemented after notice-and-comment procedures. The position was articulated in an amicus curiae brief, which - if an accepted procedure - would impose the DOL's positions on parties in litigation after the fact.

Third, the Court ruled that the DOL's interpretation of the "outside sales" exemption was simply wrong - inaccurately treating patients as the customers, when the relevant purchasers in the pharmaceutical industry are in fact the physicians whom the PSRs regularly solicit. The "sale" in this environment is the exchange of non-binding commitments between the PSR and doctor at the end of a successful call. Albeit non-binding, the physicians' commitments are valuable, as demonstrated by the commissions paid to the PSRs who acquire such commitments.

Many federal agencies are now suggesting that their new, often anti-business, readings of the law are conclusive, or at least deserving of substantial deference. Glaxo illustrates how employers, even in this political environment, may successfully hold the line against an agency's assault.