Considering the issue for the first time, the Ninth Circuit has held that pharmaceutical sales representatives (PSRs) fall within the "outside sales" exemption to the Federal Fair Labor Standards Act (FLSA)'s overtime requirements. See Christopher v. SmithKline Beecham Corp. (9th Cir. Feb. 14, 2011). Accordingly, the court rejected the claims of two former employees of GlaxoSmithKline (Glaxo) that the company violated the FLSA by classifying them as exempt. In determining that the PSRs were properly classified as exempt under the outside sales provision, the court rejected the Secretary of Labor's interpretation that this provision does not cover PSRs, finding it "plainly erroneous and inconsistent with her own prior regulations and practices."
In determining whether PSRs should be considered exempt outside sales people, the court analyzed how Glaxo sells its prescription-only products to an ultimate user. The ultimate user of a prescription drug – the patient – cannot purchase the drug without first obtaining a physician's authorization. Thus, because Glaxo is proscribed from selling prescription-only drugs directly to the public, it sells them to distributors or retail pharmacies, which then dispense those products to the ultimate user, as authorized by a licensed physician's prescription. Glaxo employs PSRs to make "calls" on physicians to encourage them to prescribe Glaxo products. On calls, PSRs typically present physicians with a variety of information about Glaxo products, provide product samples, and attempt to convince the physicians to prescribe Glaxo products, when medically appropriate, over competitor products. PSRs also try to build business relationships with physicians, respond to their concerns, and recruit them to attend Glaxo-organized dinners and conventions. Each PSR is responsible for a particular "drug bag" of medications he or she tries to induce physicians to prescribe.
Glaxo recruits applicants with prior sales experience and provides them with more than a month of training that focuses on making presentations, learning about Glaxo products and building interpersonal skills. The company also trains PSRs on how to obtain a commitment from a physician to prescribe Glaxo products if the physician believes the medication is appropriate.
PSRs receive a salary and also receive incentive-based compensation. Incentive-based compensation is paid if Glaxo's market share for a particular product increases in a PSR's territory or if sales volume, sales revenue or dose volume increases. The court noted that PSRs carry out essentially the same business functions regardless of which drug manufacturers they represent.
The FLSA's Outside Sales Exemption
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, an overtime premium of 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 Department of Labor (DOL) the authority to issue implementing regulations defining the scope of the exemption.
The DOL regulations define an "outside salesman" as an employee: (1) Whose primary duty is: (i) making sales within the meaning of section 3(k) of the Act; or (ii) obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and (2) Who is primarily and regularly engaged away from the employer's place or places of business in performing such primary duty.
Rejection of DOL's Regulation and Amicus Brief Argument
The Secretary of Labor filed an amicus brief in this case, arguing that PSRs do not meet the primary duties test for the outside sales exemption because "when an employee promotes to a physician a pharmaceutical that may thereafter be purchased by a patient from a pharmacy . . . the employee does not in any sense make the sale." Although the Second Circuit adopted the DOL's interpretation in In re Novartis Wage & Hour Litig., 611 F.3d 141 (2d Cir. 2010), the Ninth Circuit held that the DOL's regulation and interpretation are neither controlling nor persuasive.
The court held that the DOL's outside sales regulation, which merely cross-references sales under Section 3(k) of the FLSA, does not clarify the meaning of Section 3(k) and "merely incorporates the very undefined, undelimited term the Secretary seeks to clarify." The court further held that a "definition dependent almost entirely on Congress's seventy-two-year old statutory language is not an example of the DOL employing its 'expertise' to elucidate meaning to which we owe" controlling deference.
The court further held that the Secretary's interpretation that the outside sales exemption does not apply to PSRs, which was set forth in her amicus brief, is a new interpretation of the statutory language and is not entitled to deference. Additionally, the court found this interpretation both "plainly erroneous and inconsistent with [the Secretary's] own regulations and practices."
PSRs Engage in Sales
In determining that PSRs engage in sales, the court considered the structure and realities of the pharmaceutical sales industry and noted that in this industry, unlike most others, the law prohibits the actual exchange of goods for sale. Thus, in the pharmaceutical sales industry, the "sale" is the exchange of non-binding commitments between the PSR and physician at the end of a successful call. The fact that a physician's commitment to prescribe a certain drug when medically appropriate is non-binding is irrelevant; the commitment to a PSR is a meaningful exchange because pharmaceutical manufacturers value these commitments enough to reward the PSR with increased commissions when a physician increases his or her use of a drug in a PSR's "bag."
The court noted that for over seventy years, the DOL has employed the open-ended concept that a salesman is someone who "in some sense" sells and found that the agency's current "about-face regulation, expressed only in ad hoc amicus filings," is not enough to overcome this consistent message. Accordingly, the court held that the PSRs are exempt from the FLSA's overtime pay requirement.
Employers' Bottom Line
Although the Ninth Circuit's decision is not binding on courts outside of the Ninth Circuit's jurisdiction, the decision is instructive because it examines the applicability of the outside sales exemption in the context of the requirements of the particular industry rather than imposing an inflexible standard to be applied regardless of the circumstances. •