*By Stephen S. Zashin
On Monday, June 18, 2012, the U.S. Supreme Court issued its highly-anticipated opinion in Christopher v. SmithKline Beecham Corp., addressing whether pharmaceutical sales representatives qualify for the “outside sales” overtime exemption under the Fair Labor Standards Act. The Court, by a 5-4 vote, held that pharmaceutical sales representatives do indeed qualify for this exemption and are exempt from overtime. In the process, the Court steamrolled right over arguments and interpretations to the contrary that had been made by the U.S. Department of Labor (“DOL”).
The FLSA generally requires that employers pay employees at a premium overtime rate for hours worked in excess of 40 in a workweek. However, the FLSA contains many exemptions from this requirement. One of those exemptions covers people who are “employed … in the capacity of outside salesman.” 29 U.S.C. § 213(a)(1).
The FLSA does not define what is meant by the phrase “outside salesman,” though DOL regulations provide that this exemption covers employees whose primary duty is either “making sales” or “obtaining orders” and who are customarily and regularly away from the employer’s places of business while so doing (see 29 C.F.R. § 541.500(a)(1)-(2)).
This case turned on what the above language means – more specifically, what it means to “sell” something.
The pharmaceutical sales reps in this case – urged by the DOL – argued that they are not “selling” because the reps are not obtaining actual orders or binding commitments from doctors to purchase anything. Indeed, industry rules generally forbid them from actually hawking drugs in exchange for firm orders. The doctors placed their actual orders for drugs with third party distributors, not with these sales representatives. Instead, the sales reps would call upon doctors’ offices, talk up their drug companies’ products, hand out free samples, notepads, clippies, and whatnot—and hopefully obtain the doctor’s “nonbinding commitment” to prescribe the medication in question if doing so was medically appropriate. If and when the doctors followed through, the sales representatives received a commission.
The Court noted that the FLSA’s use of the word “capacity” when describing the exemption (“…employed … in the capacity of outside salesman…”) suggested a “functional, rather than a formal, inquiry” into whether the exemption applied, and functional approaches require a hard look at the context, rather than rigid application to objective tests. The Supreme Court also pointed out that the FLSA itself defines sale very broadly, covering not just the actual hawking of orders, but “any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.” 29 U.S.C. § 203(k). From this, the Supreme Court concluded that these pharmaceutical sales reps “bear all of the external indicia of salesman,” in that they are hired for their sales experience, trained to close sales, work away from the office with minimal supervision, and are paid on an incentive basis.
Along the way to its conclusion, the Supreme Court gave no deference whatsoever to the DOL’s own interpretation of the statutory and regulatory language above. The DOL had previously submitted briefs in other cases arguing for a more restrictive view of the outside sales exemption, but its reasoning and its interpretation had waffled over time—a fact noted by the Court. By the time the Christopher case hit the Supreme Court’s docket, the DOL was claiming 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 this interpretation was not only wrong in light of the statutory language, but entitled to no deference at all because it was “flatly inconsistent with the FLSA,” which imposed no such limitation concerning transfers of title.
What’s next? The pharmaceutical industry’s field sales force is somewhat unique—in most other field sales roles, it is usually clearer that employees are engaged in activities that fit more squarely into the FLSA’s definition of a “sale.” Thus, the application of the literal holding in this case in the real world may be somewhat limited – Christopher may put the kibosh on FLSA-based overtime suits by pharmaceutical sales representatives, but may do little else.
The real impact of Christopher may be in its rejection of a federal agency’s interpretation of the law. It is rare to see the Supreme Court decline to give deference to a federal agency—especially when the agency in question is attempting to interpret the very law that it was tasked to interpret. Other DOL interpretations of the FLSA may be similarly suspect, especially where (as here) the interpretation arguably butts heads with the text of the FLSA itself. There are innumerable “fuzzy” corners around the other FLSA exemptions — most notably the administrative exemption—where existing laws and regulations are less than clear. Overtime lawsuits abound in these areas. Employers should continue to tread carefully around all FLSA exemptions, though Christopher shows a possible way out should the DOL come calling.
*Stephen S. Zashin, an OSBA Certified Specialist in Labor and Employment Law, represents public and private employers in all aspects of workplace law. For more information about the FLSA or labor & employment law, please contact Stephen (ssz@zrlaw.com) at 216.696.4441.
