June 20, 2012
High Court Overrules USDOL and Approves Overtime Exemption For Outside Pharma Sales Reps
This week the U.S. Supreme Court ruled in a 5-4 decision that outside pharmaceutical sales representatives may qualify for an overtime exemption under the FLSA even though they do not personally make sales of prescription drugs. In Christopher v. SmithKline Beecham Corp., the Court resolved a circuit split on this issue and spared the pharmaceutical industry potentially billions of dollars in retroactive and prospective overtime pay for its approximately 90,000 sales representatives nationwide. In doing so, the Court refused to defer to the U.S. Department of Labor's enforcement position that pharmaceutical salespersons do not qualify for the outside sales overtime exemption because their work does not involve the transfer of title to goods. Historically, drug industry employers have classified their outside sales representatives as exempt from overtime. This 75-year old practice was not challenged by the DOL until recently when in a series of amicus briefs it filed in the courts, it argued that the current generation of pharmaceutical sales representatives do not “make sales” because they do not transfer title to or physically sell drugs to physicians and therefore are not covered by the FLSA’s outside sales exemption. First, the Court held that the courts need not defer to, and are not bound by the DOL’s new interpretation of the outside sales exemption because deferring would cause “unfair surprise” to the pharmaceutical industry which “had little reason to suspect that its longstanding practice” of treating sales representatives as exempt violated the FLSA. The Court held that “[t]o defer to the agency's interpretation in this circumstance would seriously undermine the principle that agencies should provide regulated parties fair warning of the conduct [a regulation] prohibits or requires." The Court found that “where, as here, an agency's announcement of its interpretation is preceded by a lengthy period of conspicuous inaction, the potential for unfair surprise is acute." The Court then engaged in statutory construction of the FLSA and relevant regulations and reviewed the legislative history behind the outside sales exemption. The Court described the sales reps’ activities as “obtaining a non-binding commitment from a physician to prescribe one of [SmithKline’s] drugs.” From this the Court concluded that their work is “tantamount, in [this] particular industry, to a paradigmatic sale of a commodity” and as a result SmithKline’s outside sales representatives qualify for the overtime exemption. Certainly a landmark case in the pharmaceutical industry, this decision may also have implications for employers in other industries that employ outside salespersons who, like pharmaceutical sales reps, perform tasks to facilitate or support sales but do not personally obtain binding sales commitments or transfer title to goods. The Court’s ruling also provides employers with solid grounds for challenging future DOL policy pronouncements where the agency side steps formal rulemaking. If you have any questions about the Court’s decision or overtime pay requirements generally, contact Patrick McGovern, Esq. or John Vreeland, Esq. in our Labor Law Practice Group.