The U.S. Supreme Court held today that pharmaceutical sales representatives qualify as "outside salesmen" and, accordingly, are exempt from the overtime requirements of the federal Fair Labor Standards Act (FLSA).
The U.S. Supreme Court held today that pharmaceutical sales representatives qualify as "outside salesmen" and, accordingly, are exempt from the overtime requirements of the federal Fair Labor Standards Act (FLSA). See Christopher v. SmithKline Beecham Corp. (No. 11-204, U.S. June 18, 2012). Importantly, the Court also refused to give controlling deference to the Department of Labor's (DOL) change of position in interpreting the regulation to exclude these employees, which was first announced in amicus briefs filed in court litigation. The Court noted that where, as here, an agency's announcement of its interpretation is preceded by a lengthy period of conspicuous inaction, "the potential for unfair surprise is acute."
Background
The FLSA requires employers to pay non-exempt employees at least the minimum wage and, for all hours worked in excess of forty in one workweek, overtime compensation at a rate that is at least time and one-half their regular rate of pay. There are some exceptions to these requirements, including one for workers employed as outside sales people. The FLSA does not define the term "outside sales" but instead gives the DOL the authority to issue implementing regulations defining the scope of the exemption.
The DOL's regulations define an "outside salesman" as an employee: (1) whose primary duty is making sales within the meaning of section 3(k) of the Act[1]; and (2) who is customarily and regularly engaged away from the employer's place or places of business in performing such primary duty[2]. The Court noted that the DOL has stressed that the requirement that outside salesmen make their own sales is met whenever an employee "in some sense make[s] a sale."
Pharmaceutical Industry
SmithKline Beecham develops, manufactures and sells prescription drugs. Because prescription medication can only be dispensed with a physician's prescription, pharmaceutical companies focus their direct marketing efforts on medical practitioners who have the authority to prescribe the drugs. Pharmaceutical sales representatives (PSRs, also known as detailers) provide information to physicians about the company's products in hopes of persuading them to write prescriptions for the products in the appropriate cases. The employees in this case were PSRs who were assigned a portfolio of the company's drugs and whose primary duty was to obtain nonbinding commitments from physicians to prescribe those drugs in appropriate cases.
The employees were compensated through a base salary and incentive pay, but did not receive time and a half for hours worked in excess of forty in one week. They sued the employer, claiming the failure to pay them overtime violated the FLSA.
Supreme Court Decision
The Supreme Court rejected the plaintiffs' claims, finding that they are exempt under the outside sales regulation. In reaching this decision, the Court rejected DOL's interpretation that "[a]n employee does not make a ‘sale' for purposes of the ‘outside salesman' exemption unless he actually transfers title to the property at issue."
The Court held that controlling deference, which is usually given to an agency's interpretation of its own ambiguous regulation, was not appropriate in this case for a number of reasons. First, the agency's interpretation would impose potentially massive liability on the employer for action that occurred well before the DOL announced its interpretation. Thus, to defer to that interpretation would "seriously undermine the principle that agencies should provide regulated parties "fair warning of the conduct [a regulation] prohibits or requires.'" The Court held that to defer to the DOL's interpretation in this case would result in precisely the kind of " ‘unfair surprise' ‘against which our cases have long warned.'"
The Court noted that until 2009, the pharmaceutical industry had little reason to suspect that its longstanding practice of treating PSRs as exempt outside salesmen violated the FLSA. The statute and regulations were not clear and included a catchall phrase "other disposition" that could be interpreted to apply to a nonbinding commitment from a physician to prescribe a particular drug.
Further, the Court noted that despite the industry's decades-long practice of classifying PSRs as exempt, the DOL never initiated any enforcement actions with respect to PSRs or otherwise suggested it thought the industry was acting unlawfully. The Court held that where, as here, an agency's announcement of its interpretation is preceded by a lengthy period of conspicuous inaction, "the potential for unfair surprise is acute."
Emphasizing the importance of the notice and predictability of rulemaking, the Court held, "[i]t 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 Court found the DOL's interpretation that a sale under the outside sales regulation demands a transfer of title to be "quite unpersuasive," lacking the "hallmarks of thorough consideration" and "flatly inconsistent" with the language of the FLSA.
After rejecting the DOL's interpretation, the Court then analyzed the text of the FLSA and the DOL's regulations and determined that the PSRs make sales for the purposes of the FLSA and, thus, are exempt outside salesmen within the meaning of the DOL's regulations.
Employers' Bottom Line:
The Court's decision is good news for the pharmaceutical industry because it likely will stem the tide of litigation in this area. Further, the Court's rejection of the way the DOL announced its change in position in interpreting the outside sales regulation may dissuade federal agencies from taking similar actions in the future and may encourage more predictability in agency rulemaking.
If you have any questions regarding the Court's decision or other labor or employment issues, please contact David Prather, a partner in our Memphis office at dprather@fordharrison.com, or the Ford & Harrison attorney with whom you usually work.
[1] The definition also includes any employee whose primary duty is obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; however, that portion of the definition was not at issue in this case.
[2] There was no dispute that the PSRs were customarily and regularly engaged away from their employer's place of business in performing their responsibilities, so the issue the Court had to determine was whether the primary duty of the PSRs was making sales.