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The United States Supreme Court decided on Monday, June 18, that
pharmaceutical sales representatives are exempt from the overtime
pay requirements of the Fair Labor Standards Act (FLSA) because
they satisfy the FLSA's "outside salesman" exemption.
The case is Christopher v. SmithKline Beecham Corp.
Background of Case
Petitioners Michael Christopher and Frank Buchanan worked for
respondent SmithKline Beecham as pharmaceutical sales
representatives. In that role, the petitioners' primary duties
were to meet with physicians, describe respondent's products
and seek to obtain nonbinding commitments from the physicians to
prescribe the respondent's drugs in appropriate cases. The
petitioners alleged that they regularly worked more than 40 hours
per week and that SmithKline Beecham violated the FLSA by failing
to pay them overtime compensation.
Supreme Court's Decision
The case turned on whether pharmaceutical sales representatives
are outside salesmen and thereby exempt from overtime under the
FLSA and within the meaning of the regulations promulgated by the
United States Department of Labor (DOL). In an amicus brief filed
in the case, the DOL took the position for the first time that, in
order to qualify for the outside salesman exemption, an employee
must "actually transfer[] title to the property at issue"
(which pharmaceutical sales representatives do not do). In a 5-to-4
decision, the Supreme Court concluded that the DOL's
interpretation of its own regulations was not entitled to
controlling deference, in part because the DOL's interpretation
would impose potentially massive overtime pay liability for years
of employment that occurred before the DOL ever announced its
interpretation. The Court also noted that the pharmaceutical
industry had classified its sales representatives as exempt
employees for decades, and the DOL had never initiated any
enforcement actions or suggested the employees were
misclassified.
In the absence of controlling deference, the Court found the
DOL's interpretation of its regulations - that a sale requires
a transfer of title - unpersuasive. The Court then interpreted the
FLSA itself to determine whether pharmaceutical sales
representatives are exempt as outside salesmen. The FLSA's
definition of "sale" includes the phrase "other
disposition," which the Court interpreted to include
arrangements that are tantamount, in a particular industry, to a
"functional" sale of a commodity. Based on that
interpretation, the Court concluded that pharmaceutical sales
representatives make sales for purposes of the FLSA because they
seek to obtain nonbinding commitments from physicians to prescribe
specific medications. The Court also stated that pharmaceutical
sales representatives bear all the external indicia of salesmen in
that they are hired for their sales experience, are subject to
minimal supervision and generally work in territories. In addition,
the Court noted that the specific petitioners each received average
compensation in excess of $70,000 per year, did not perform manual
labor and are not the kind of employees that the FLSA was intended
to protect.
In contrast, the four dissenting justices reasoned that
pharmaceutical sales representatives should not be deemed outside
salesmen under the FLSA because, within the ordinary meaning of the
word, they do not actually "sell" anything to physicians.
Instead, the dissenters viewed the representatives' work as
promotional activities designed to stimulate sales made by someone
else (i.e., the pharmacists who sell prescription drugs to
patients).
Impact of Case
The Christopher decision is a significant victory for
the pharmaceutical industry, which employs approximately 90,000
pharmaceutical sales representatives and which faced numerous
misclassification/overtime pay lawsuits under the FLSA. More
broadly, the Supreme Court's functional analysis of the outside
salesman exemption, based on the employees' responsibilities in
the context of the industry in which they work, is likely to make
it easier for employers in a variety of industries to classify
their sales employees as exempt.
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