Supreme Court’s Rx for Pharmaceutical Industry

by Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

For the past decade, employers have been frustrated by what they describe as a moving target when it comes to properly classifying employees as either exempt (and thus not eligible for overtime) or non-exempt (and thus overtime eligible) under the Fair Labor Standards Act (FLSA). For many, the U.S. Department of Labor (DOL) has not provided clear or consistent guidance as to what is expected of employers, leaving a puddle of uncertainty that has cost both workers and the business community greatly. Nearly identical jobs have been found to be exempt by one court and non-exempt by another, with both courts relying on what the DOL said its regulations meant. Opinion letters have been retracted and prior agency positions have been reversed, all in a relatively narrow period of time considering that the FLSA is over 70 years old. With mushrooming liability and bottom-line impacting FLSA collective actions, this uncertainty (surprise even) thwarts good faith business planning.

Against this backdrop, the U.S. Supreme Court’s June 18, 2012, decision in Christopher v. SmithKline Beecham Corp. is important to employers for two main reasons. (To see our National eAuthority on the ruling, click here.)

First, for employers in the pharmaceutical industry, it dissolves the swirling fog over whether pharmaceutical sales representatives satisfy a particular exemption from mandatory overtime pay under the FLSA. Rather pointedly, the Supreme Court held that pharmaceutical sales representatives “make sales” within the meaning of the FLSA exemption for outside salespersons. The duties of a “detailer” as traditionally performed in the pharmaceutical industry—persuading physicians to write prescriptions for drug products—satisfy the FLSA overtime exclusion for “outsides salesmen.” No question, the industry or context in which the duties are performed mattered to the Supreme Court. Key to the exemption was the requirement that outside salesmen actually make sales as a principal duty. Congress defined “sale” in the FLSA to include “or other disposition.” According to the Supreme Court, obtaining nonbinding commitments from physicians to prescribe pharmaceutical products was a sale, thus removing the industry from the cross-hairs of a five-plus year squabble that cost millions of dollars. And, even more directly, the Supreme Court reminded us that the point of the FLSA was to protect oppressed workers. Pharmaceutical sales representatives, who typically perform unique, non-standardized duties for which they are paid substantial compensation, “are hardly the kind of employees that the FLSA was intended to protect.”

As with any FLSA exemption, of course, the particularized facts control. Sales representatives will have to satisfy all of the tests for the outside sales exemption, including regularly working away from or “outside” the employer’s place of business—a factor that was not at issue in the SmithKline Beecham case.

Second, the SmithKline Beecham decision tells us that that flip-flopping interpretations by an agency of its own rules will eventually lead to their demise. Normally, when a federal agency says, “this is what our regulations really mean” the courts listen; and they defer. But once the agency’s pronouncement of what its regulations mean resemble a roller coaster in full circle, they are no longer persuasive. Lacking persuasion, traditional deference is withdrawn, as Justice Samuel Alito commented in the decision: “Our practice of deferring to an agency’s interpretation of its own ambiguous regulations undoubtedly has important advantages, but this practice also creates a risk that agencies will promulgate vague and open-ended regulations that they can later interpret as they see fit, thereby ‘frustrating the notice and predictability purposes of rulemaking’.”

In SmithKline Beecham, the Court rejected the DOL’s interpretation of what “making sales” for purposes of the outside salesman exemption meant because it was “flatly inconsistent” with the FLSA and “plainly lacks the hallmark of thorough consideration.” Embedded in a 2009 amicus brief rather than through prior notice and comment, the DOL’s latest interpretation was nothing short of “unfair surprise” to employers. Massive liability within an industry cannot be triggered by surprise: “Until 2009, the pharmaceutical industry had little reason to suspect that its longstanding practice of treating detailers as exempt outside salesmen transgressed the FLSA.” For decades, the practice of obtaining nonbinding commitments from physicians was the bedrock of pharmaceutical sales duties. Nothing in the FLSA or its regulations clearly warned employers that this industry practice (currently impacting approximately 90,000 pharmaceutical sales representatives) violated the FLSA, and the DOL had been conspicuously silent on the point for years. To turn the industry on its head based on an implausible reading of the term “making sales” would not further the purpose of the FLSA or the safeguards for fair rulemaking.

In an earlier article, we wrote about The Three C’s of FLSA Compliance. The first “c” was classification—making sure employees were properly classified as exempt or nonexempt for FLSA overtime eligibility. The SmithKline Beecham decision on June 18, 2012 addressed one such classification issue, outside salesmen, and provided us with a filter for viewing other similar classification cases.

Margaret C. Alli is a shareholder in the Detroit Metro office of Ogletree Deakins.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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