In Christopher v. SmithKline Beecham Corp., the Supreme Court ruled on whether pharmaceutical sales representatives are properly classified as exempt under the Fair Labor Standards Act (FLSA). Short answer – Yes.
The FLSA requires that employees are paid at least the federal minimum wage for all hours worked, and receive overtime pay at time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek. Employees are exempt from the overtime requirements of the FLSA if they serve in certain capacities, including in the capacity of an outside salesperson.
An outside salesperson is: (1) any person whose primary duty is making sales – which includes making a sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition; and (2) one who is customarily and regularly engaged away from the employer’s place or places of business in performing this duty.
This case arose out of an action filed in the District Court of Arizona. The employees/Petitioners alleged that their employer, SmithKline Beecham, violated the FLSA by failing to pay them overtime wages. In an amicus brief, the Department of Labor announced its position that the pharmaceutical representatives were not exempt. The DOL explained that a sale requires a consummated transaction directly involving the employee for whom the exemption is sought. After the Supreme Court granted certiorari, the DOL continued to argue that the reps are non-exempt, but modified its position to explain that the employee must actually transfer title to the property at issue. This position is in contrast to the Department’s earlier, pre-lawsuit interpretation of its regulations which required only that an employee make a sale “in some sense.” Summary judgment was granted in favor of the Company, and the judgment was affirmed by the Ninth Circuit before heading up to the Supreme Court.
Why ask the question as to whether pharmaceutical sales reps are, in fact, classified as exempt outside sales people? Isn’t it obvious they are out in the field every day selling medicines to doctors? It is not as clear as it initially seems. The reps – known as detailers – are not completing the sales, they are only stimulating the sales. Since prescription drugs are not actually sold until distributors and retail pharmacies order the drugs, reps are not traditional salesmen.
In the pharmaceutical industry, the most the reps can obtain from the physician is a non-binding commitment that ensures the eventual disposition of the product. This is the most the applicable regulations governing pharmaceutical companies permit the reps to do. However, as noted in the Opinion, the reps end goal was not merely to make physicians aware of the medically appropriate uses of a particular drug, but to convince physicians to prescribe the drug in appropriate cases. Even though they are not salespeople in the traditional sense, they are certainly still selling.
Another issue that arose in this case – is the DOL entitled to controlling deference for its new interpretation of the regulations? Short answer – not necessarily. While an agency’s interpretation of its own ambiguous regulation generally receives strong deference, the deference is not without its limits. In this case, the Supreme Court explained there were strong reasons for withholding deference. To defer to the DOL would surely result in an unfair surprise, as there was no notice to the affected parties. By skipping the notice-and-comment rulemaking, and announcing its position in an amicus brief, the Company argued that the DOL would have essentially pulled the rug out on many, many employers out there.
“It is one thing to expect regulated parties to conform their conduct to an agency’s interpretations once the agency announces them; it is quite another to require regulated parties to divine the agency’s interpretations in advance or else be held liable when the agency announces its interpretations for the first time in an enforcement proceeding and demands deference.”
The problems with the DOL’s position: (1) its interpretation lacked the “hallmarks of thorough consideration”; (2) there was no opportunity for public comment; and (3) the DOL advanced a different interpretation in the Supreme Court than it had been arguing before.
The Supreme Court estimated there are 90,000 sales reps. Had this case turned out the other way, something tells me there would have been a lot of litigation and reclassifying going on. That being said, all FLSA cases should serve as a reminder to conduct internal FLSA audits to confirm that employees are properly classified. And, yes, an article on FLSA audits is coming up…