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CCH® PAYROLL — 7/09/12

U.S. Sup. Ct.: pharmaceutical sales representatives are exempt

Pharmaceutical sales representatives qualify as exempt outside sales persons under the FLSA regulations, ruled the U.S. Supreme Court in a 5-4 decision. The High Court determined that the DOL’s current interpretation of its regulation—that a sale requires a transfer of title—which it announced in a series of amicus briefs, was not entitled to deference. Rather, viewing the activity of the sales reps in the context of the pharmaceutical industry, the majority concluded that they were exempt outside sales persons.Justice Breyer filed a dissent (Christopher v SmithKline Beecham Corp, USSCt, 162 LC ¶36,027.)

The prescription drug industry is subject to extensive federal regulation, including the requirement that prescription drugs be dispensed only upon a physician’s prescription. Pharmaceutical companies promote their products to physicians through sales reps who try to persuade physicians to write prescriptions for products. Sales reps for SmithKline spent about 40 hours in the field calling on physicians during normal business hours and an additional 10 to 20 hours attending events and performing other tasks. The reps were not required to punch a time clock and they were subject to minimal supervision. Their compensation included both a base salary and incentive pay. Incentive pay was based on the performance of their assigned portfolio of drugs in their assigned sales territories.

According to the sales reps’ suit, SmithKline violated the FLSA by failing to compensate them for overtime. The district court granted SmithKline’s motion for summary judgment, agreeing that the reps were employed in the capacity of outside salesmen,” under 29 U.S.C. Sec. 213(a)(1), and therefore were exempt from the FLSA’s overtime requirement. The reps filed a motion to amend the district court judgment to accord controlling deference to the DOL’s interpretation of the pertinent regulations, announced in an amicus brief filed in a similar action against Novartis. However, their motion was rejected. The Ninth Circuit agreed that the DOL’s interpretation was not entitled to controlling deference and affirmed.

Hallmarks of consideration

Because the DOL’s current interpretation—that a sale demands a transfer of title—lacked the hallmarks of thorough consideration, the Court found it unpersuasive. The DOL first announced its view that pharmaceutical sales reps are not outside sales persons in a series of amicus briefs, and there was no opportunity for public comment, so the interpretation that initially emerged from the DOL’s internal decision-making process proved to be untenable. It was also flatly inconsistent with the FLSA Sec. 203(k), which defines “sale” to mean, among other things, a “consignment for sale,” and a consignment for sale does not involve the transfer of title. To the Court, it was apparent that 29 CFR Sec. 541.501 does not mean that a sale must include the transfer of title, only that transactions involving a transfer of title are included in the term “sale.” Additionally, the DOL’s “explanation that obtaining a nonbinding commitment to prescribe a drug constitutes promotion, and not sales,” was not convincing to the Court.

Traditional tools of interpretation

Because the Court found that the DOL’s interpretation was neither entitled to Auer deference nor persuasive in its own right, it turned to traditional tools of interpretation to determine whether the sales reps were exempt outside sales persons. Here, the court determined that the language of the exemption, exempting anyone “employed in the capacity of an outside salesman,” counsels in favor of a functional inquiry that views an employee’s responsibilities in the context of the particular industry in which the employee works.

The statutory definition of outside sales gives three important textual clues. The definition indicates that the examples enumerated in the text are illustrative, not exhaustive. Second, the list of transactions included in the definition is best read to mean “one or some indiscriminately of whatever kind.” Further, the definition includes a broad catch-all phrase “other disposition,” which is reasonably interpreted as including those arrangements that are tantamount, in a particular industry, to a paradigmatic sale of a commodity. Given this interpretation of “other disposition,” it followed that the sales reps made sales under the FLSA and so were exempt from overtime.

SmithKline’s pharmaceutical sales representatives obtain nonbinding commitments from physicians to prescribe the company’s drugs. This kind of arrangement, in the unique regulatory environment within which pharmaceutical companies operate, comfortably falls within the catch-all category of “other disposition.” The exemption is premised on the belief that exempt employees normally earn salaries well above the minimum wage and perform a kind of work that is difficult to standardize to a particular timeframe and cannot be spread to other workers. In light of the average salary of pharmaceutical reps, the Court concluded that they were hardly the kind of employees that the FLSA was intended to protect.

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