U.S. Supreme Court Holds that Pharmaceutical Representatives Are Exempt Outside Sales Employees Under The FLSA

On June 18, 2012 the Supreme Court, in a rebuke to the U.S. Department of Labor, held that pharmaceutical company representatives are exempt from overtime under the outside sales exemption of the Fair Labor Standards Act.

Facts of the Case: In Christopher v. SmithKline Beecham Corp., pharmaceutical sales representatives claimed that they were improperly denied overtime pay. Their duties involved persuading doctors to make non-binding commitments to write prescriptions for their employer’s drugs in appropriate cases. (Federal law makes it illegal for representatives to obtain binding commitments from doctors to “buy” their employer’s products.) The representatives were compensated by a base salary plus incentive pay. The incentive pay was based on the sales volume or market share of their assigned drugs in their assigned sales territory.

Because there was no actual “sale,” the representatives argued that they could not be exempt as “outside sales” employees under the FLSA and, thus, were entitled to overtime pay. The U.S. Department of Labor, which was not a party to the case,agreed with the representatives, although it did so not by issuing regulations but through “friend of the court” briefs. The DOL maintained that these employees were engaged in non-exempt promotional activities, rather than sales, because their work did not result in any actual transfer of title of property from drug companies to doctors. The pharmaceutical companies argued that the nonbinding commitments obtained from doctors satisfied the DOL’s prior position, which was that there must “in some sense” be a sale for the exemption to apply.

The Court’s Ruling: The Supreme Courtrejected the arguments advanced by the representatives and the DOL. The Court majority held that the employees were engaged in sales within the meaning of the “catchall” phrase in existing regulations that a transaction be “in some sense” a sale. This, coupled with the longstanding practice of the pharmaceutical companies in classifying their employees as exempt outside sales, never before challenged by the DOL in any enforcement action, made the DOL’s contrary position as “friend of the court” not entitled to any deference.

Practical Impact: For employers outside the pharmaceutical industry, the most interesting aspect of the decision will be the Court’s hostility to the Department of Labor’s interpretation, which the Court found “quite unpersuasive.” The Court was especially troubled that the Department of Labor did not give advance notice of its position through notice and comment rulemaking, but tried to impose its views retroactively by filing briefs in pending cases filed by employees.