U.S. Supreme Court Holds Pharmaceutical Sales Representatives are
Exempt "Outside Sales" Employees under the FLSA
The U.S. Supreme Court has, for the first time, interpreted the applicability of one of the so-called "white collar exemptions" to the Fair Labor Standards Act ("FLSA"). In a 5 to 4 decision, sharply divided along ideological lines, the conservative majority held that sales representatives in the pharmaceutical industry are not entitled to overtime premiums because they fall within the "outside sales" exemption to the FLSA, and that a contrary position recently taken by the U.S. Department of Labor ("DOL") is not entitled to deference because it is inconsistent with both the language and the purpose of the agency's own regulations and the FLSA itself.
DOL regulations provide that an employer is not required to pay overtime premiums to an employee who is customarily and regularly engaged in "making sales" outside of the employer's place of business. Pharmaceutical companies have long classified their sales representatives as overtime exempt employees pursuant to this exemption. In Christopher v. SmithKline Beechem Corporation ("SKB"), SKB's sales representatives (known as "detailers") challenged this classification, asserting that the work they do does not constitute "sales" work.
The detailers are primarily engaged in visiting physicians, educating them about SKB's products and persuading them to prescribe SKB medications (as opposed to similar competing medications) when use of such a drug is otherwise indicated. The detailers obtain "non-binding commitments" from physicians to do so. There is no direct sale of products from SKB to physicians. Instead, the detailer persuades the physician to prescribe the product, which results in a later sale of the product by a pharmacy to a patient, a sale in which the detailer has no involvement. The detailers asserted that the interactions with physicians that they engage in are not "sales" and thus the exemption does not apply to them.
In making this claim, the detailers relied on statements made by the DOL in a brief the agency had filed in a similar case before the Second Circuit Court of Appeals (In re Novartis Wage and Hour Litigation.). In Novartis, the DOL had asserted that, for purposes of the outside sales exemption, the term "sale" applies only to a transaction involving a "transfer of title" as to the product sold, and that there is no such transfer in the transactions engaged in by pharmaceutical sales representatives. The Second Circuit deferred to the DOL's narrow interpretation of its own regulation and held that the pharmaceutical sales representatives were not exempt outside sales employees.
In Christopher, the Ninth Circuit came to a contrary conclusion. It held that the DOL's narrow definition of the term "sale" was not entitled to any deference because it was not in line with either the language or the intent of the FLSA. The U.S. Supreme Court granted certiorari to resolve this dispute between the Circuits. The High Court sided with the Ninth Circuit, ruling that the DOL's narrow definition as to what constitutes a "sale" was inconsistent with both the language and intent of its own regulations and with the FLSA itself.
In so ruling, the Court relied, in part, on the broad wording in the regulation defining a "sale", which states that the term "includes any sale, exchange, contract to sell, consignment for sale, shipment for sale" or "other disposition" (emphasis added) and it held that "other disposition" would include a non-binding commitment from a physician to prescribe SKB's products. The Court also noted that SmithKline's detailers "bear all of the external indicia of salesmen," including the fact that they were hired for their sales experience, they were trained to "close sales" by obtaining as much of a commitment as possible and they received incentive pay which was based on the sales volume and market share of their assigned portfolio of drugs in their assigned territories. The Court also considered the fact that the employees in question earned relatively high pay. Each of the plaintiffs earned an average of more than $70,000 per year, and therefore were "hardly the kind of employees that the FLSA was intended to protect."
The Court further noted that the pharmaceutical industry has employed detailers in essentially the same way for decades, but the DOL has never initiated any enforcement action asserting that they were misclassified or issued any opinion or guidance to that effect, and that the agency's newly announced, narrow interpretation of "sales" would "impose potentially massive liability on [SmithKline] for conduct that occurred well before the interpretation was announced." The Court also considered the problem the outside sales exemption was intended to address, which is that the work these employees performed "was difficult to standardize to any time frame and could not be easily spread to other workers after 40 hours in a week, making compliance with the overtime provisions difficult and generally precluding the potential job expansion intended by the FLSA's time-and-a-half overtime premium."
What this Means for Employers in General
The Christopher decision is primarily a victory for the pharmaceutical industry and industries with similar sales employees who are not directly involved in individual sales transactions. However, to the extent that lower federal courts adopt the Supreme Court's broad approach in interpreting other FLSA exemptions, it is also good news for all employers facing lawsuits alleging misclassification of their exempt employees.
The decision is also good news to the extent that it deters the DOL from attempting to narrow the exemptions through ad hoc pronouncements rather than going through the formal process of changing its regulations (a process that requires a period of public comment before a regulation is finalized) particularly when, as in this case, the new interpretation may result in millions of dollars of liability for unpaid overtime.
However, it is important for employers to understand that this ruling only applies to interpretation of the FLSA. Christopher may have little or no effect on the interpretation of exemptions to state-law overtime pay requirements, and wage and hour laws in many states, including California, provide for exemptions which are narrower, or are interpreted more narrowly, than the FLSA exemptions.
Richard S. Rosenberg