Pharmaceutical sales representatives are outside salesmen exempt from the overtime requirements of the Fair Labor Standards Act, the U.S. Supreme Court has ruled. Christopher et al. v. SmithKline Beecham Corp., dba GlaxoSmithKline, No. 11-204 (June 18, 2012). Both the majority and dissent in the 5 to 4 decision agreed that the Court owed no deference to the Secretary of Labor’s interpretation of the FLSA’s outside sales exemption and related regulations as asserted in amicus briefs filed by the Department of Labor in various circuit courts and the Supreme Court. The Court’s decision in this class action upholds a 2011 Ninth Circuit decision, resolving a split between the Ninth and Second Circuits, and ending years of uncertainty for pharmaceutical companies.
Court Deference to Regulatory Agencies has Limits
Justice Samuel Alito, writing for the majority, analyzed the reason the Court afforded no deference to the interpretation(s) of the regulation offered by the Department of Labor. Although in Auer v. Robbins, 519 U.S. 452 (1997), the Court ruled that in ordinary circumstances, deference to an agency’s interpretation of its own ambiguous regulation is appropriate, the Court noted that deference is unwarranted when the agency’s interpretation is “plainly erroneous or inconsistent with the regulation” or when the interpretation “does not reflect the agency’s fair and considered judgment on the matter in question.”
Here, Justice Alito said, an important, “strong reason” for the Court withholding deference was the element of surprise to the pharmaceutical industry after 70 years of DOL acquiescence to the practice of classifying PSRs as exempt employees under the FLSA. The Court noted that affording deference to a new or contrary regulatory interpretation advanced by DOL through an amicus curiae (friend of the court) brief would allow the agency to evade the required notice-and-comment process for implementing regulations. Under these circumstances, it concluded, deference by courts would encourage agencies to implement vague regulations that would be subject to a variety of interpretations.
In addition, the Court found the DOL’s interpretation unpersuasive. Because the Court afforded no deference to DOL’s interpretation of the statute and regulations, it “employ[ed] traditional tools of interpretation to determine whether [PSRs] are exempt outside salesmen.”
Definition of “Sales” is Expansive and Functional
The Court determined the applicability of the outside sales exemption to PSRs hinged solely on whether PSRs make a “sale” when they provide product information to physicians in an attempt to persuade physicians to prescribe products. The industry is subject to a federal regulation that prescription drug must be dispensed only upon a physician’s prescription. Therefore, the industry, for more than 70 years, has employed PSRs to promote products to physicians, urging them to write prescriptions for the products in appropriate cases. The plaintiffs argued that because it is illegal for PSRs and doctors to exchange money for pharmaceuticals, PSRs do not actually make sales.
Federal law defines an outside salesperson as an employee (1) whose primary duty is: (i) making sales within the meaning of Section 3(k) of the FLSA; or (ii) obtaining orders or contracts for services or for the use of facilities for which consideration will be paid by the client or customer; and (2) who is customarily and regularly engaged away from the employer’s place or places of business in performing such primary duty. 29 C.F.R. § 541.500(a).
Here, the company employed the two named plaintiffs in the case as PSRs for approximately four years. Their average gross annual pay was $74,000, 25%-30% of which was incentive compensation based on sales volume or market share within their territory. The PSRs’ duties included calling on physicians in their assigned territory to provide information to physicians regarding the pharmaceuticals in the PSR’s portfolio with the goal of obtaining a nonbinding commitment from the physician to prescribe the drugs to appropriate patients. PSRs worked “in the field” and had no “office” and very little day-to-day supervision.
The majority’s opinion outlined the “important textual clues” the Court used in interpreting the statute to determine that PSRs make “sales.” First, the statute’s use of the term “in the capacity of [an] outside salesman” favored a “functional,” rather than formal, analysis, with an eye toward the “employee’s responsibilities in the context of the particular industry in which the employee works.” Second, in defining “sale,” the regulations use “includes” instead of “means,” which, the Court explained, indicates an illustrative, rather than exhaustive, list. The same regulation also uses “any” to modify the definition of “sale,” further expanding the definition. Finally, Congress included the catchall “other disposition” in its statutory definition of “sale.” The Court concluded that “‘other disposition’ seems . . . to represent an attempt to accommodate industry-by-industry variations in methods of selling commodities.” The transfer of title to tangible property is not required for an employee to “in some sense” make a sale. Further, evidence that plaintiffs earned 25%-30% of their compensation as incentive pay based on sales within their territory, worked “in the field,” and had little day-to-day supervision reinforced the Court’s reasoning. PSRs thus “bear all of the external indicia of salesmen,” and exempt classification, the majority determined, was consistent with the purpose of the FLSA’s exemption for outside salesmen.
Judge Stephen Breyer, writing for three other justices in his dissent, agreed the DOL’s interpretation, in its amicus brief, should not be given “any especially favorable weight.” A PSR is not an “outside salesman,” however, under Judge Breyer’s examination of the statute and the related regulations.
Most significantly, this decision should serve to abate numerous similar claims pending across the country. Because the Court held PSRs are exempt under the outside sales exemption based on how “sale” is defined, the decision is broadly applicable to the industry. According to Will Anthony, chair of Jackson Lewis’ Class Action Practice, “The Court’s decision was extremely well reasoned. Giving a functional definition to the expansive definition of a ‘sale’ in the FLSA regulations was correct from both a legal and practical perspective. This was a real win for the Pharma industry and, frankly, for the thousands of current sales representatives who wanted nothing to do with this litigation.”
Paul DeCamp, chair of the firm’s Wage and Hour Practice and former Administrator of DOL’s Wage and Hour Division, adds, “These PSR cases underscore everything that is wrong with our wage and hour laws. Over the past several years, the industry has had to spend many millions of dollars defending itself against claims by relatively highly-compensated former employees who never actually would have wanted to be classified as non-exempt while they were employed.” He notes, “Current employees prefer to be exempt, but former employees want to be non-exempt. That, plus lawyers looking to make a living, is what drives litigation. It is a shame that the laws are sufficiently ambiguous to allow for such opportunistic lawsuits.” DeCamp observes, “In addition to the victory that this ruling brings for the pharmaceutical industry, its workers, and common sense, perhaps it will also serve as a catalyst for changes in our wage and hour laws. Greater clarity, simplicity, and predictability are needed so that employers and workers alike will be able to know exactly what the law requires. Our economy today is much more than 1930s-era brick-and-mortar factories, and our wage and hour laws need to catch up with that reality.”