On June 18, 2012, in a 5-4 decision, the U.S. Supreme Court held in Christopher v. SmithKline Beecham Corp. that pharmaceutical sales representatives are not entitled to overtime compensation. The Court found that these representatives are exempt as outside salespersons within the meaning of the Department of Labor’s (DOL) regulations issued under the Fair Labor Standards Act (FLSA).

The case was brought by two pharmaceutical sales representatives who were employed by SmithKline Beecham Corp. (SmithKline) for four years. They spent approximately 40 hours a week in their assigned sales territories discussing the features, benefits, and risks of SmithKline’s prescription drugs with physicians. The representatives spent an additional 10 to 20 hours a week performing work related tasks. Due to federal regulation, prescription drugs can only be dispensed upon a physician’s prescription and therefore, their objective was to obtain nonbinding commitments from physicians to prescribe these drugs.

The representatives brought this action in the U.S. District Court for the District of Arizona, alleging that SmithKline did not comply with the FLSA by failing to compensate them for overtime. SmithKline was granted summary judgment on the basis that the sales reps were outside salespersons. The Court of Appeals for the Ninth Circuit affirmed this decision, holding that because the commitment that the sales reps would obtain from the physicians was the maximum allowed by law, they made sales. This decision contradicted an earlier decision by the Second Circuit, which held that these sales reps were entitled to overtime compensation.

The Supreme Court affirmed the Ninth Circuit’s decision rejecting the application of the DOL’s most recent interpretation of its regulations on outside salespersons. The Court noted that the DOL expressed its interpretations in amicus briefs in pending litigation and thus denied employers “fair warning” as to whether or not the FLSA required overtime compensation to these sales reps. Therefore, while the general rule is that an agency’s interpretation of its own regulations should receive deference by the courts, the Court unanimously decided that such deference was not required in this case.

The Court, having determined that the DOL interpretation of its regulations was not entitled to deference, then addressed whether the sales reps’ activities constituted “sales.” The majority opinion found the FLSA’s definition of sale to be broad and to accommodate industry variations of selling. The Court held that because of the regulatory environment in which pharmaceutical companies operate, a nonbinding commitment falls within this broad definition. Further, the Court found that the FLSA was not meant to protect employees such as these sales reps because they were well-compensated with average compensation at approximately $70,000 a year.

The four justice dissent, however, argues that the pharmaceutical sales representatives’ indirect method of selling does not fall under the FLSA’s definition of “sale.” The dissent argues that these representatives are more promotional salespersons than outside salespersons because they do not sell anything to physicians, and their information or advice on prescribing a drug does not necessarily lead to physicians doing so.

From an employer’s standpoint, this decision will be helpful in the future in asserting the applicability of the FLSA’s exemptions. Rather than viewing an exemption with a narrow and technical focus, this decision allows a “functional” analysis of the position at issue. This of course makes practical sense rather than strictly applying Congressional language written in 1938 to today’s work environment.