In a major victory for pharmaceutical companies, the U.S. Supreme Court recently held that company sales representatives who promote their employer’s products to doctors and hospitals are exempt from the overtime requirements of the Fair Labor Standards Act (“FLSA”). In doing so, the Court resolved a split in the Circuit Courts of Appeal over the scope of the “outside salesman” exemption to the FLSA’s overtime pay requirements. The Court’s holding in Christopher v. SmithKline Beecham Corp. regarding the scope of this exemption has provided much needed clarity to pharmaceutical companies and employers with similar types of sales forces who have relied – and hope to continue to rely – on the exemption.
Whether the FLSA requires pharmaceutical companies to pay their sales representatives overtime under the FLSA has generated significant litigation. As we have previously reported, a number of federal appellate courts have considered whether the FLSA’s “outside salesman” and/or “administrative” exemptions applies to these employees. Until now, the results have been inconsistent, leaving employers with many questions. Indeed, cases from the Second Circuit (covering the states of New York, Connecticut, and Vermont), Third Circuit (covering the states of New Jersey, Pennsylvania, Delaware, U.S. Virgin Islands), and the Ninth Circuit (covering California, Alaska, Arizona, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington) had reached varying conclusions.
Factual Background to the SmithKline Decision
The exemption at issue in SmithKline, the “outside salesman” exemption, applies to those employees “[w]hose primary duty is [ ] making sales.” Under the FLSA, a “sale” includes “any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.” Because federal law prohibits pharmaceutical manufacturers from directly selling prescription medications to patients, many companies practice what is called “detailing,” whereby their sales representatives, or “detailers,” provide information to physicians about the company’s products with the goal of encouraging them to write prescriptions for these products to their patients. The representatives are legally prohibited from actually consummating sales with the physicians. Consistent with this practice, SmithKline’s sales representatives, including plaintiffs Michael Christopher and Frank Buchanan (the “Reps”), would “call[ ] on physicians in an assigned sales territory to discuss the features, benefits, and risks of an assigned portfolio of [SmithKline’s] prescription drugs.” The primary objective of these visits would be to obtain a non-binding commitment from the physician to prescribe those drugs so “detailed.” In the course of these efforts, the Reps would typically spend approximately 40 hours per week “detailing,” and approximately 10 to 20 hours each week attending events, reviewing product information, returning phone calls, and other miscelleneous tasks.
The FLSA obligates employers to compensate non-exempt employees for hours in excess of 40 per week at the rate of one-and-a-half times the employees’ regular wages. SmithKline did not pay the Reps time-and-a-half wages when they worked in excess of 40 hours per week because it classified them as exempt from overtime. As a result, the Reps brought suit alleging violations of the FLSA for failing to compensate them for overtime.
In a prior similar lawsuit brought in the Second Circuit Court of Appeals, the U.S. Department of Labor (“DOL”) filed an amicus brief in which it advocated against applying the outside sales exemption to the detailers – reasoning that the outside sales exemption does not apply unless a “transfer of title” to the property takes place. The DOL filed a similar amicus brief in the Supreme Court in the SmithKline case.
The Court’s Decision
The Supreme Court held that pharmaceutical sales representatives are covered by the outside salesman exemption and, in so ruling, rejected the position of both the Reps and the DOL that under the FLSA’s regulations a transfer of title is required for a “sale” within the meaning of the exemption. The Court focused on the unique relationship between pharmaceutical sales representatives and the physicians whom they solicit:
Obtaining a nonbinding commitment from a physician to prescribe one of [SmithKline’s] drugs is the most that [the Reps] were able to do to ensure the eventual disposition of the products that [SmithKline] sells. This kind of arrangement, in the unique regulatory environment within which pharmaceutical companies must operate, comfortably falls within the [regulation’s] catch-all category of “other disposition."
In further support of its decision, the Court noted that the Reps “bear all of the external indicia of salesman.” For example, the Court emphasized that the Reps:
- were hired for their sales experience;
- were trained to close each sales call by obtaining the maximum commitment possible from the physician;
- worked away from the office with minimal supervision; and
- were rewarded for their efforts with incentive compensation.
Finally, in considering the equity of fair warning for employers, the Court emphasized that the DOL had previously interpreted the FLSA regulations as requiring only that an employee “in some sense” make a sale, and otherwise “acquiesce[d] in the sales practices of the drug industry for over 70 years.” It would, therefore, be unfair to change the guidance given employers for many years especially when lack of notice would have significant financial repercussions.
The Supreme Court’s decision in SmithKline generally gives employers in the pharmaceutical industry vindication in classifying their sales representatives as exempt from overtime under the FLSA. In this case, the Court looked to job duties and responsibilities of the particular detailers and took into consideration industry practice and regulatory compliance. While there may exist analogous situations outside of the pharmaceutical industry, where the same arguments for application of the outside salesman exemption can be made, employers should conduct an analysis of their own circumstances and not rely unconditionally on SmithKline. Employers should consult with counsel to make these assessments. Attorneys in the Gibbons Employment & Labor Law Department regularly assist employers in these reviews and other employment and labor matters.