By Elisabeth Rowley Wall, Esq.
On June 18, 2012, the U.S. Supreme Court, in a 5-4 opinion by Justice Samuel Alito, ruled on the issue of whether pharmaceutical sales representatives are entitled to receive overtime pay under the Fair Labor Standards Act (“FLSA”). The Court held that pharmaceutical sales reps, who promote the 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 are exempt from the federal overtime pay requirements. The Court’s landmark holding has brought much needed clarity to the scope of the FLSA’s “outside salesman” exemption, on which lower courts have been split.
The highly anticipated decision came by way of Christopher v. Smithkline Beecham Corp., in which GlaxoSmithKilne was defending legal claims from two former salesmen seeking overtime pay on behalf of a nationwide class of representatives employed by the drug maker. Though the FLSA does not actually define “outside salesman,” it defines “sale” as “any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.” The heavily regulated pharmaceutical industry regulations legally prohibit representatives from actually closing sales, and as the Court advised, sales representatives’ responsibilities should be viewed in the context of the particular industry in which they work. Pharmaceutical sales reps regularly call on physicians in their assigned sales territory to discuss the features, benefits, and risks of prescription drugs. Thus, the Court found that although they do not actually close sales, pharmaceutical reps nevertheless act “in the capacity of a salesman,” in that the primary objective of these visits is to obtain non-binding commitments from physicians to prescribe the drugs to their patients.
Pharmaceutical sales reps were found to spend approximately forty hours per week calling on physicians and approximately ten to twenty hours each week attending events, reviewing product information, returning phone calls and other miscellaneous tasks. Under the FLSA, employers must compensate non-exempt employees for time worked in excess of forty hours per week at the rate of one-and-a-half times the employees’ regular wages. SmithKline did not pay their sales reps time-and-a-half wages as provided by the FSLA because the company classified them as exempt from overtime. As a result, the sales reps brought suit alleging violations of the FLSA for failing to compensate them for overtime. Not only was the Court not persuaded by the argument for the reasons herein, but it also 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.”
In addition to the impact this decision has made on the pharmaceutical industry, it is equally notable that the Court declined to give controlling deference to the Department of Labor’s (“DOL’s”) interpretation of its own regulation. In an amicus brief filed by the DOL, it took the position that pharmaceutical sales reps are not exempt outside salesmen because to qualify for this exemption, an employee must “actually transfer title to the property at issue,” which is something that pharmaceutical sales reps cannot do. In so holding, the Court noted the DOL’s “decades long” silence on the pharmaceutical industry’s practice of classifying its sales reps as exempt employees. It further opined that non-exempt classification for pharmaceutical sales reps could expose drug companies to retroactive liability and cost the industry billions of dollars for years of employment that “occurred before the [DOL’s] interpretation was announced.”
This decision is a victory for employers in the pharmaceutical industry and provides other employers with similar sales models some peace of mind. However, while other employers may find themselves in situations where the same arguments can be made for applying the “outside salesman” exemption, they should conduct an analysis of their individual circumstances and not rely on Christopher unconditionally. Employers should consult with counsel when making these assessments.