[authors: William I. Greenbaum, Esq., and Lawren H. Briscoe, Esq.]
On June 18, 2012, the United States Supreme Court issued a highly anticipated ruling on the issue of whether pharmaceutical sales representatives are entitled to receive overtime pay under the Fair Labor Standards Act (the “FLSA”).
In a 5-4 decision, the Supreme Court affirmed the Ninth Circuit’s ruling in Christopher v. SmithKline Beecham Corp. and held that the pharmaceutical sales representatives who promote sales of prescription drugs and obtain nonbinding commitments from doctors to prescribe those drugs but do not themselves sell the drugs to doctors or patients are “outside salesmen” and therefore exempt employees not entitled to overtime under the FLSA. The Christopher decision resolved a circuit split and overruled the Second Circuit’s decision in In re Novartis Wage & Hour Litigation, which held that pharmaceutical sales representatives are not exempt under the FLSA.
In reaching its conclusion, the Court employed an expansive reading of the FLSA’s “outside salesmen” exemption, advising that the sales representatives’ responsibilities be viewed in the context of the particular industry in which they work – in this case, the “highly regulated” pharmaceutical industry. Although industry regulations legally prohibit the representatives from closing sales, the Court found that they nevertheless act “in the capacity of a salesman,” as defined in the FLSA. This is so, the Court reasoned, because the FLSA broadly defines “sale” to include “any sale, exchange, contract to sell, consignment for sale, shipment for sale or other disposition.” The Court concluded that the “catchall phrase ‘other disposition’ is most reasonably interpreted as including those arrangements that are tantamount, in a particular industry, to a paradigmatic sale of a commodity” and that the sales representatives’ efforts to persuade physicians to prescribe their company’s drugs met this standard. In addition, the Court noted that the specific petitioners each received average compensation in excess of $70,000 per year, did not perform manual labor and were “hardly the kind of employees that the FLSA was intended to protect.”
Beyond the significance this decision has within the pharmaceutical industry, it is equally notable for the position the Court took with respect to the weight – or lack thereof – it gave the Department of Labor’s (“DOL’s”) interpretation of its own regulation. In an amicus brief filed by the DOL, the DOL took the position that pharmaceutical sales representatives are not exempt outside salesmen because, in order to qualify for this exemption, an employee must “actually transfer title to the property at issue,” something that pharmaceutical sales representatives cannot do. The Court, however, declined to give the DOL’s interpretation controlling deference. In so holding, the Court noted the DOL’s “decades long” silence on the pharmaceutical industry’s practice of classifying its sales representatives as exempt employees. It further opined that adopting such an interpretation would “impose potentially massive” overtime pay liability for years of employment that “occurred before the [DOL’s] interpretation was announced.” The Court also found the DOL’s interpretation “unpersuasive” and lacking “the hallmarks of thorough consideration.”
The Christopher decision is a victory for employers and pharmaceutical manufacturers in particular. It provides a flexible interpretation of what it means to “sell” under the FLSA and limits the DOL’s ability to enact last-minute interpretations of long-standing regulations in a way that would invalidate employers’ long-standing practices and understanding of the law.
If you have any questions about the classification of employees or overtime pay under the Fair Labor Standards Act, please call William I. Greenbaum at 973-422-6766 or Lawren H. Briscoe at 973-422-6706. We also would be pleased to provide you with assistance with respect to other employment practice and workplace compliance issues.