Supreme Court Finds Pharmaceutical Representatives Exempt From Overtime

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Pharmaceutical sales rep iStock_000005240599XSmall.jpgThis morning the U.S. Supreme Court ruled 5-4 that pharmaceutical representatives are "outside salesmen" exempt from the overtime requirements of the Fair Labor Standards Act. Christopher v. Smithkline Beecham Corp. (.pdf).

This has been a hotly-contested issue in the courts and the subject of a split between the federal appellate courts, with the Ninth and Seventh Circuits holding that drug reps could qualify for the outside sales exemption, and the Second Circuit holding that they could not. (For more background, see our prior posts here.)

Facts of the Case

As described by the Court, pharmaceutical sales representatives, also known as "detailers," provide information to physicians about the company's products in hopes of persuading them to write prescriptions for the products in appropriate cases. They also call on physicians within an assigned territories to discuss information regarding the company's drugs, and seek nonbinding commitments from physicians to prescribe those drugs in appropriate cases. Detailers' compensation includes an incentive component, based upon the sales volume or market share of their assigned drugs within their territories. Detailers normally work beyond normal business hours and with minimal supervision. 

Deference to the DOL?

The first issue addressed in the Supreme Court's decision today is whether the courts should have deferred to the U.S. Department of Labor's position that detailers are not exempt. The DOL first announced its view that pharmaceutical sales representatives were not exempt outside salesmen in an amicus brief filed in the Second Circuit Court of Appeals in 2009. The Department reiterated its position in amicus briefs filed in subsequent cases on the issue, including the case before the Supreme Court. Specifically, the DOL argued that pharmaceutical representatives were not "salesmen" because they did not make "sales," in the sense that they did not directly consummate transactions, but rather secured only nonbinding commitments from healthcare providers to purchase their employers' products. 

Ordinarily, courts will defer to administrative agencies' interpretations of their own regulations. However, such deference is not required where the agency's interpretation is plainly erroneous or inconsistent with the regulation, or does not reflect the agency's fair and considered judgment on the matter in question. The latter might apply, for example, where the agency has changed its interpretation over time, or where it appears that the regulation is nothing more than a "convenient litigating position" or "post hoc rationalization." 

In this case, the Court's majority noted that the DOL's position would create massive liability for pharmaceutical companies based upon conduct occurring before the DOL made its views public in 2009. The Court also observed that the DOL's position was "preceded by a very lengthy period of conspicuous inaction" by the DOL to enforce its newly announced interpretation. The most plausible explanation for this inaction, the Court found, was that up until 2009 the DOL evidently did not think that pharmaceutical sales representatives were misclassified. Thus, the Court determined that the DOL's interpretation of its regulations was not entitled to judicial deference. 

Detailers Are Exempt

Turning to the merits of the case, the majority of justices rejected the DOL's argument that pharmaceutical reps are not exempt because they "promote" pharmaceuticals rather than actually "selling" them. The Court instead held that the FLSA requires a "functional, rather than a formal inquiry" on this issue, and that an employee's responsibilities must be viewed "in the context of the particular industry in which the employee works." In the pharmaceutical industry, "[o]btaining a nonbinding commitment from a physician to prescribe" a pharmaceutical company's drugs "is the most that [sales representatives] were able to do to ensure the eventual disposition of the products" being sold. The Court held that given the regulatory environment applicable to the pharmaceutical industry, this arrangement comfortably fell within the regulatory language defining "sales." 

The Court also observed that sales representatives "bear all of the external indicia of salesmen." They were hired for their sales experience, trained to close sales, worked away from the office, and compensated with sales incentives. The Court noted that "it would be anomalous to require respondents to compensate petitioners with overtime, while at the same time exempting employees who function identically to petitioners in every respect except that they sell physician-administered drugs, such as vaccines and other injectable pharmaceuticals, that are ordered by the physician directly rather than purchased by the end user at a pharmacy with a prescription from the physician." 

Dissent: No DOL Deference, But Detailers' Work Is Promotion, Not Sales

In a dissenting opinion joined by Justices Ginsburg, Sotomayor, and Kagan, Justice Bryer agreed with the majority that the DOL's interpretation of the regulations was not entitled to deference, but reached a different view regarding the merits of the case. Following an exhaustive review of the FLSA, the DOL's regulations, Department of Labor reports, and industry ethics codes governing the Detailers' work, Justice Breyer concluded that "the drug detailers do not promote their 'own sales,' but rather 'sales made, or to be made, someone else,'" and therefore could not qualify as "outside salesmen" under the FLSA.

Insights for Employers

While certainly a major relief for pharmaceutical companies, it is not immediately clear that this case will have a major impact upon most employers. While certainly more esoteric, the most interesting piece of this decision is not the Court's ruling on the scope of the sales representative exemption, but it's determination that the DOL's interpretation of its own regulations was not entitled to judicial deference. Given the current political climate, pushing through new legislation or even new regulations to change the FLSA is likely to be extraordinarily difficult if not impossible. That has left the DOL and other federal agencies in the position of having to change the law by modifying their interpretations of existing rules or changing their enforcement priorities. This case illustrates that legislation by administrative interpretation has its limits, and may encourage further challenges to some of the Department's more aggressive interpretations of the FLSA and its regulations.