On June 18, 2012, a 5-4 split United States Supreme Court held in Christopher v. SmithKline Beecham Corp. that under the most reasonable interpretation of the Department of Labor’s regulations, pharmaceutical sales representatives are exempt from overtime as outside salespersons under the Fair Labor Standard Act. This decision resolves the split in authority between the Ninth and Second Circuits in favor of employers and strikes a blow to the deference accorded to the DOL in interpreting its regulations.

Background

The respondent-employer, GlaxoSmithKline (Glaxo), produces, markets, and sells pharmaceutical products. Glaxo employs pharmaceutical sales representatives’ (PSRs) to obtain nonbinding commitments from physicians to prescribe their employer’s prescription drugs in appropriate cases. PSRs focus their efforts on physicians, rather than pharmacies because prescription drugs may only be dispensed upon a physician’s prescription under federal law.

The petitioners, former Glaxo PSRs, brought a class action lawsuit on behalf of current and former employees alleging that Glaxo violated the Fair Labor Standards Act (FLSA) by failing to pay overtime compensation. Glaxo moved for summary judgment on the grounds that PSRs fall under the FLSA’s outside sales and administrative exemptions. Without addressing the administrative exemption, the district court agreed that PSRs are outside salespersons and granted summary judgment. The petitioners subsequently filed a motion to alter or amend the judgment in light of the Department of Labor’s (DOL) amicus brief filed in the In re Novartis Wage and Hour Litigation case, which articulated the DOL’s position that PSRs are entitled to overtime compensation. The district court rejected this argument and denied the petitioners’ motion.

On appeal, the Ninth Circuit affirmed the district court’s decision. It held that PSRs make sales within the meaning of the FLSA because the commitment that PSRs obtain from physicians is the maximum possible under the rules applicable to the pharmaceutical industry. Further, it agreed with the lower court that the DOL’s interpretation of the relevant regulations was not entitled to controlling deference.

The Ninth Circuit’s decision in Christopher was at odds with the Second Circuit’s decision in Novartis and created a split in authority. As predicted, the Supreme Court granted certiorari in November 2011 to resolve the split between the courts of appeal.

Holding: The DOL’s Interpretations Are Not Entitled to Deference and Are Unpersuasive

The Supreme Court struck down the DOL’s interpretations of its regulations on two separate grounds.

First, the court held that the DOL’s interpretations are not entitled to deference because relying on them would result in “unfair surprise.” The statute and regulations do not provide clear notice to employers that treating PSRs as exempt outside salespersons violated the FLSA. Further, the DOL never initiated any enforcement actions with respect to the PSRs or otherwise suggested they were misclassified. Finally, the DOL’s interpretations of the outside salesperson exemption have been inconsistent. While the DOL initially took the view that a ‘sale’ requires a consummated transaction directly involving the employee for whom the exemption is sought, it changed course after the Supreme Court granted certiorari. It then maintained that “an employee does not a make a ‘sale’…unless he actually transfers title to the property at issue.”

Second, the court found the DOL’s interpretations to be unpersuasive and inconsistent with the FLSA. It concluded that the DOL’s interpretations are inconsistent with the definition of “sale,” which includes sales that do not involve the “transfer of title” mandated by the DOL. Further, the DOL’s explanation that the work of PSRs constitutes promotion, not sales, is flawed and inconsistent with the regulations. Because the court found the DOL’s interpretations wholly unpersuasive, it employed “traditional tools of interpretation” to determine whether the petitioners were exempt outside salespersons.

Holding: PSRs Qualify as Outside Salesmen under a Reasonable Interpretation of the FLSA

Interpreting the definition of “sale” in a common sense manner, the Supreme Court held that PSRs fall within the FLSA’s outside salesperson exemption. The statutory definition of “sale” includes “any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.” 29 U.S.C. §203(k) (emphasis added). The court concluded that the PSRs’ primary duty of obtaining nonbinding commitments from physicians to prescribe one of the respondent’s drugs “comfortably falls within the catchall category of “other disposition’” because, given regulatory constraints in the pharmaceutical industry, it “is the most that petitioners were able to do to ensure the eventual disposition of the products that respondent sells.”

The Christopher court further held that the petitioners “bear all of the external indicia of salesmen.” They were hired for their sales experience, trained to close sales, worked away from the office with minimal supervision, and rewarded for their efforts with incentive compensation. Moreover, the petitioners were not the kind of employees that the FLSA was intended to protect because they earned salaries well above the minimum wage and performed the kind of work that is difficult to standardize to a particular time frame and cannot be easily spread to other workers. Finally, the broad language of the regulations and the statutory definition of “sale” do not support the petitioner’s argument that an employee is properly classified as a nonexempt promotional employee when another employee actually makes the sale in the technical sense (i.e. enters the order).

Implications and Lessons for Employers

The United States Supreme Court conclusively resolved the question for employers of whether PSRs are properly classified as exempt outside salespersons under the FLSA. Additionally, the court’s common sense reading of the outside salesperson exemption and refusal to defer to the DOL’s interpretations is good news for all employers as the DOL has become more pro-plaintiff in its enforcement efforts.

The issue of whether pharmaceutical sales representatives engage in “sales” under California law has yet to be decided. However, the Christopher decision may influence California courts to follow the common sense application of the outside salesman exemption to PSRs.