In a very favorable decision to employers, Christopher v. Smithkline Beecham Corp., dba GlaxoSmithKline, the U.S. Supreme Court held (5-4) that pharmaceutical sales representatives (“PSRs”) are exempt from overtime laws despite the fact that they do not technically “make sales.” In so doing, the Court resolved a split between the Second and Ninth Circuits regarding the applicability of the “outside sales” exemption of the Fair Labor Standards Act (“FLSA”) to PSRs, while potentially paving the way for successfully applying this exemption to other industries.
Petitioners, former PSRs for GlaxoSmithKline, brought this action in the U.S. District Court for the District of Arizona. Petitioners alleged that GlaxoSmithKline violated the FLSA by failing to pay overtime, and they are seeking both back pay and liquidated damages. GlaxoSmithKline moved for summary judgment on the basis that the PSRs were exempt from the FLSA. The District Court agreed and granted summary judgment. Petitioners then filed a motion to alter or amend the judgment, on the grounds that the Department of Labor’s (“DOL”) interpretation of the applicable regulations — which were announced in an uninvited amicus brief filed by the DOL in a similar action then pending in the Second Circuit — were controlling. The District Court rejected this argument and denied the motion. On appeal, the Ninth Circuit affirmed the District Court’s ruling, finding that the DOL’s interpretation was not controlling, and holding that, because the non-binding commitment PSRs obtained from physicians was the most they could ethically do, PSRs therefore made sales within the meaning of the outsides salesman exemption.1 The Court granted certiorari to resolve a split between this Ninth Circuit ruling and a Second Circuit case, In re Novartis Wage and Hour Litigation, which held that PSRs were not exempt as outside salespeople.
The FLSA and Relevant DOL Regulations
In making its decision, the Court analyzed various provisions of the FLSA and three of the “DOL’s” regulations regarding the definition of “outside salesman.”
The DOL provided additional guidance in connection with its promulgation of these regulations, stressing that an employee is an “outside salesman” when the employee, “in some sense, has made sales.” 69 Fed. Reg. 22162.
In 2009, the DOL attempted to provide further interpretation of these regulations by filing amicus curiae briefs in both the Second and Ninth Circuit actions, stating that “a ‘sale’ for the purposes of the outside sales exemption requires a consummated transaction directly involving the employee for whom the exemption is sought.” After the Supreme Court granted certiorari, the DOL further changed its interpretation in yet another amicus brief, stating that “[a]n employee does not make a ‘sale’… unless he actually transfers title to the property at issue.”
The Pharmaceutical Industry
The Court’s decision relied heavily on the fact that the pharmaceutical industry is subject to extensive federal regulations (including the requirement that prescription drugs be dispensed only upon a physician’s prescription), which prohibit PSRs from actually selling their employer’s product. Instead, PSRs try to persuade physicians to write prescriptions for their employer’s products in appropriate cases. This type of direct marketing to physicians is called “detailing” and has been the predominant practice in the pharmaceutical industry for more than 70 years.
Rejecting the DOL’s argument that “sales” require a transfer of title, the Court found that the statute requires a “functional, rather than a formal, inquiry that views an employee’s responsibilities in the context of the particular industry in which the employee works.” In holding that the PSRs fell under the “outside sales” exemption, the Court found that the PSR’s primary duty of obtaining a nonbinding commitment from physicians to prescribe certain drugs constituted a “disposition” under Section 203(k) and, therefore, that the PSRs were “making sales.” The Court further found that the PSR position encompassed “all of the external indicia of salesmen,” such as being hired for their sales experience, receiving sales training, working away from the office with minimal supervision, and being compensated on an incentive commission basis related to the number of prescriptions filled within their assigned territories.
The Court also found significant that for 70 years, the DOL had failed to initiate any enforcement actions or otherwise suggest that it thought the pharmaceutical industry was acting unlawfully by treating PSRs as exempt. The Court concluded that to now hold otherwise would “impose potentially massive liability... for conduct that occurred well before the interpretation was announced,” resulting in “unfair surprise.”
Significance for Employers
This case is a huge victory for employers in the pharmaceutical industry and means they can continue their current practice of classifying PSRs as exempt and compensating them on a commission basis. This case also has the potential to significantly impact employees in other regulated industries, such as mutual fund wholesalers, and may provide support for the classification of a wider variety of employees in other industries as outside salespeople, even if the employees do not directly transfer title of the product they are selling. Moreover, the Court’s refusal to defer to the DOL’s interpretation of the FLSA as advanced in amicus curiae briefs may halt further attempts by the DOL to affect policy changes in this manner.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:Fischer-Debra
This article was originally published by Bingham McCutchen LLP.