Pharmaceutical Sales Representatives Qualify For FLSA's Outside Sales Overtime Exemption

Volume 11, Issue 6
June 21, 2012

On June 18, 2012, the United States Supreme Court issued a decision in Christopher v. Smithkline Beecham, No. 11-204, concluding that pharmaceutical sales representatives (PSRs) are exempt from overtime under the "outside sales" exemption provided by the Fair Labor Standards Act (FLSA).  In so holding, the Supreme Court resolved a hotly-contested issue that created a split of opinion between the federal appellate courts.  The PSRs at issue were hired for their sales experience and trained to close sales.  Their primary objective was to obtain commitments from physicians to prescribe their employers' products, a process commonly known in the pharmaceutical industry as "detailing."  Each week, the PSRs spent about 40 hours in the field calling on physicians during normal business hours and an additional 10-20 hours attending events and performing other miscellaneous tasks.  They were not required to record or report their working hours and were subject to only minimal supervision.  The PSRs received no overtime premium pay for any hours worked above 40 in a workweek.  The FLSA provides that employees working in "outside sales" are exempt from overtime compensation.  Under the FLSA, the term "sale" is defined to include any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.  Beyond that definition, the FLSA does not further specify the job requirements of an exempt outside salesperson.  The U.S. Department of Labor ("DOL"), which enforces the FLSA, issued regulations further defining an outside salesperson.  According to the DOL, an outside salesperson is any employee whose primary duty is making sales as defined by the FLSA, including the transfer of title to tangible property.  Starting in 2009, the DOL announced its view that PSRs were not exempt under the FLSA because they did not make "sales," in the sense that such employees do not directly consummate transactions, but rather only "promote" pharmaceuticals.  Until 2009, the pharmaceutical industry had little reason to suspect that its longstanding practice of treating PSRs as exempt may violate the FLSA.  Despite the industry's decades-long practice as to PSRs, the DOL had never challenged it or otherwise suggested that the industry was acting unlawfully.  In addition, once the U.S. Supreme Court decided to review the Christopher case, the DOL changed course again and took an even narrower position, maintaining that an employee does not make a sale for purposes of the FLSA unless he actually "transfers title" to property.  Ordinarily, courts will defer to administrative agencies' interpretations of their own regulations.  However, as the Supreme Court explained, courts are not required to give deference to an agency's interpretation of a regulation or statute that is plainly erroneous, inconsistent with the law, or does not reflect fair and considered judgment. In this case, the Supreme Court found the DOL's interpretation of what constitutes a "sale" under the FLSA to be "quite unpersuasive" and unworthy of any deference.  The Court initially pointed out that the DOL first announced its more restrictive interpretation in a series of court briefs such that there was no opportunity for public comment.  It also noted that the DOL's new position, if accepted, would create massive liability for pharmaceutical companies based upon conduct occurring long before the DOL made its views public and only after a very lengthy period of conspicuous inaction by the DOL, resulting in "unfair surprise."  In applying its own analysis of the applicable law and the PSRs' job responsibilities, the Court held that obtaining commitments from physicians to prescribe a pharmaceutical company's drugs is the most that the PSRs are able to do to ensure the eventual disposition of the products being sold.  The Court thus concluded that the PSRs' job duties comfortably fell within the definition of "sales" under the FLSA.  The Court also rejected the he DOL's restrictive "transfer of title" interpretation of "sales."  The Christopher decision is certainly a major victory for the pharmaceutical industry, but also signals the high court's willingness not to accord deference to a government agency's more aggressive and strained interpretations of the statutes it is charged with enforcing.  With this decision, the Obama Administration's predilection to change laws by modifying agency interpretations of existing regulations appears to have suffered a notable setback.

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