Pharmaceutical Sales People Ruled Exempt from Overtime Pay
Pharmaceutical Sales Reps Held Exempt from Overtime
The U.S. Supreme Court ruled in Christopher et al. v. SmithKline Beecham Corp., dba GlaxoSmithKline, No. 11-204 (June 18, 2012) that pharmaceutical sales representatives (PSPs) are outside salesmen exempt from the overtime requirements of the Fair Labor Standards Act. Both the majority and dissent in the 5 to 4 decision agreed that the Court owed no deference to the Secretary of Labor’s interpretation of the FLSA’s outside sales exemption and related regulations as asserted in amicus briefs filed by the Department of Labor in various circuit courts and the Supreme Court.
U. S. Supreme Court Says Deference to Regulatory Agencies Has Limits
The majority opinion was that in ordinary circumstances, deference to an agency’s (here, DOL‘s) interpretation of its own ambiguous regulation is appropriate, but that deference is unwarranted when the agency’s interpretation is “plainly erroneous or inconsistent with the regulation” or when the interpretation “does not reflect the agency’s fair and considered judgment on the matter in question.” That is what the Court found DOL’s interpretation in this case.
The Court said that a reason for not giving deference to this DOL interpretation, that PSPs are non-exempt, was the element of surprise to the pharmaceutical industry after 70 years of DOL acquiescence to the practice of classifying PSRs as exempt employees under the FLSA. The Court found the DOL’s interpretation unpersuasive.
Court Says Definition of “Sales” is Expansive and Functional
The Supreme Court determined that the applicability of the outside sales exemption to PSRs hinged solely on whether PSRs make a “sale” when they provide product information to physicians in an attempt to persuade physicians to prescribe products. The industry is subject to a federal regulation that prescription drug must be dispensed only upon a physician’s prescription. Therefore, the industry, for more than 70 years, has employed PSRs to promote products to physicians, urging them to write prescriptions for the products in appropriate cases. The plaintiffs argued that because it is illegal for PSRs and doctors to exchange money for pharmaceuticals, PSRs do not actually make sales, therefore, they could not be exempt.
DOL regulations define an outside salesperson as an employee (1) whose primary duty is: (i) making sales within the meaning of Section 3(k) of the FLSA; or (ii) obtaining orders or contracts for services or for the use of facilities for which consideration will be paid by the client or customer; and (2) who is customarily and regularly engaged away from the employer’s place or places of business in performing such primary duty. 29 C.F.R. § 541.500(a).
Here, the company employed the two named plaintiffs in the case as PSRs for approximately four years. Their average gross annual pay was $74,000, 25%-30% of which was incentive compensation based on sales volume or market share within their territory. The PSRs’ duties included calling on physicians in their assigned territory to provide information to physicians regarding the pharmaceuticals in the PSR’s portfolio with the goal of obtaining a nonbinding commitment from the physician to prescribe the drugs to appropriate patients. PSRs worked “in the field” and had no “office” and very little day-to-day supervision.
The majority’s opinion outlined what it called the “important textual clues” the Court used in interpreting the statute to determine that PSRs make “sales.” First, the statute’s use of the term “in the capacity of [an] outside salesman” favored a “functional,” rather than formal, analysis, with an eye toward the “employee’s responsibilities in the context of the particular industry in which the employee works.” Second, in defining “sale,” the regulations use “includes” instead of “means,” which, the Court explained, indicates an illustrative, rather than exhaustive, list. The same regulation also uses “any” to modify the definition of “sale,” further expanding the definition. Finally, Congress included the catchall “other disposition” in its statutory definition of “sale.” The Court concluded that “‘other disposition’ seems . . . to represent an attempt to accommodate industry-by-industry variations in methods of selling commodities.” The transfer of title to tangible property is not required for an employee to “in some sense” make a sale. Further, evidence that plaintiffs earned 25%-30% of their compensation as incentive pay based on sales within their territory, worked “in the field,” and had little day-to-day supervision reinforced the Court’s reasoning. The majority of the court determined that PSRs thus “bear all of the external indicia of salesmen,” and exempt classification was consistent with the purpose of the FLSA’s exemption for outside salesmen.
Not only is this decision a huge relief for the employer in this case, this decision should serve to abate numerous similar claims pending across the country. Because the Supreme Court held PSRs are exempt under the outside sales exemption based on how “sale” is defined, the decision is broadly applicable to this industry and others as well.
Adair Buckner is an Amarillo attorney with Buckner & Cross, L.L.P. She is Board Certified in Labor and Employment Law by the Texas Board of Legal Specialization. Her other areas of practice include business law, business disputes, commercial litigation, estate planning, and probate. You can reach Adair at (806)-322-7777 or firstname.lastname@example.org. This material is not intended to be legal advice. The contents are intended for general information purposes only.
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