June 21, 2012
In a ruling that may have broad implications for all Fair Labor Standards Act
(FLSA) white-collar exemptions, the U.S. Supreme Court held in a 5–4 decision
that pharmaceutical sales representatives are not subject to overtime pay
pursuant to the FLSA. Christopher v. SmithKline Beecham Corp. (S.Ct. June
18, 2012).
Christopher Decision
The FLSA establishes minimum wages and generally requires payment of an
overtime rate of time-and-a-half for all hours worked over 40 in a given
workweek for “non-exempt” employees. However, the overtime requirements do not
apply to employees working in “exempt” jobs, including in “the capacity of an
outside salesman.”
In Christopher, the petitioners Michael Christopher and Frank Buchanan worked
for SmithKline Beecham as pharmaceutical reps, meeting with doctors in their
clinics and offices and obtaining “nonbinding commitments” from medical
providers to prescribe SmithKline’s drugs when appropriate. The reps never
directly sold prescription drugs to doctors, pharmacies or patients and did not
enter into contracts or directly transfer products. The U.S. Department of Labor
(DOL) argued in amicus briefs in two Circuit Courts of Appeal for a very
restrictive view of the outside sales exemption: that a “sale” requires a
consummated transaction directly involving the employee at issue. Then in the
Supreme Court, DOL changed to an even more restrictive position and argued that
the employee “does not make a ‘sale’. . .unless he actually transfers title to
the property at issue.”
In holding that the reps’ work obtaining commitments from physicians to
prescribe prescription medications qualified them as “outside salesmen”, the
Court noted that the reps were hired on the basis of their sales experience,
worked outside an office with minimal supervision and were awarded “incentive
pay” — an uncapped amount based on sales in assigned territories — on top of
their base salary. The Court further held that the language of the FLSA outside
sales exemption was an attempt to accommodate industry-by-industry variations in
methods of selling goods. This regulatory intent, combined with established
industry practice and other indicia that the employees were engaged in sales,
was sufficient to bring them within the outside sales exemption.
Justice Alito noted in the majority opinion that the FLSA exempted outside
salesmen from overtime pay because they “typically earned salaries well above
the minimum wage” and received other benefits:
Petitioners – each of whom earned an average of more than $70,000 per
year and spent between 10 and 20 hours outside normal business hours each
week performing work related to his assigned portfolio of drugs in his
assigned sales territory – are hardly the kind of employees that the FLSA
was intended to protect. And it would be challenging, to say the least, for
pharmaceutical companies to compensate [reps] for overtime going forward
without significantly changing the nature of that position.
Court Limits on New Pseudo-Regulation Via Enforcement
Separate from the merits of whether the FLSA outside sales exemption applies
in this particular case, the Court unanimously rejected the DOL’s attempt to
implement, in effect, new regulation through its amicus brief. Justice Alito
wrote that the DOL had not once in 70 years of the drug-rep pay system filed an
enforcement action of this kind with respect to pharmaceutical reps or suggested
that the industry practice of treating reps as exempt was unlawful. Instead of
going through a formal rulemaking process, the agency attempted to implement
what Justice Alito called an “unfair surprise” on the industry. The Court also
expressly declined to defer to the DOL’s interpretation, noting that deference
is not appropriate where the agency’s interpretation is “plainly erroneous or
inconsistent with the regulation,” where there is reason to believe that it
“does not reflect the agency’s fair and considered judgment on the matter” and
where it would constitute “unfair surprise” in departing from long-standing
agency and industry practice. Significantly, Justice Breyer, writing for the
dissenting members of the Court, agreed with this aspect of the majority
decision, saying that the DOL’s interpretation should not be given “any
especially favorable weight.”
The Christopher lawsuit was part of the Administration’s increased
enforcement initiative and attempt to bring more workers under federal
wage-and-hour laws as non-exempt employees. In connection with these efforts,
the DOL has aggressively expanded its use of amicus briefs in recent years, and
courts have had mixed reactions to those attempts. The ruling in Christopher
sends a message that courts need not defer to positions taken in litigation by
federal agencies that present a new regulatory interpretation. Further, in light
of the decision, courts should give more weight to established industry and
agency practice and recognize that FLSA-exempt “selling” includes more
activities than simple consummation of a sales transaction.
Employer Takeaways
Despite the Christopher ruling, the DOL can be expected to continue taking an
aggressive position regarding the exempt status of employees. While those who
employ pharmaceutical reps can rest a bit easier, other employers — especially
those in targeted industries such as healthcare and financial services, or with
employees in targeted professions such as computer professionals and outside
sales reps — should take a hard look at their exempt positions and determine
whether the exempt determination will withstand DOL scrutiny.
For assistance with these or other wage and hour matters, please contact the
authors or other members of the McGuireWoods
Labor & Employment
team.