On June 18, 2012, the U.S. Supreme Court resolved a split among the U.S. Circuit Courts of Appeals, holding that pharmaceutical sales representatives are exempt outside sales employees under the Fair Labor Standards Act (“FLSA”). Thus, such employees are not entitled to overtime protection.
In Christopher v. SmithKline Beecham Corp., two former pharmaceutical sales representatives alleged that their former employer violated the FLSA when it failed to pay them time-and-a-half for hours worked over 40 on a weekly basis. The defendant contended that the plaintiffs were exempt from overtime protection because they were outside salesman as provided by section 213(a)(1) of the FLSA. The trial court agreed, granting summary judgment to the defendant. The plaintiffs appealed to the Ninth Circuit Court of Appeals. The U.S. Department of Labor (“DOL”), the administrative agency charged with enforcement of the FLSA, filed an amicus brief supporting the plaintiffs’ position.
Essentially, the plaintiffs and the DOL maintained that a “sale” for purposes of the exemption requires a “consummated transaction.” Pharmaceutical sales representatives do not consummate transactions, their argument continued, but instead obtain only non-binding commitments from physicians to prescribe pharmaceuticals to patients. Accordingly, the DOL contended that the plaintiffs were not conducting “sales” and, therefore, not exempt. The Ninth Circuit disagreed and affirmed the decision of the trial court, contrary to a similar case in which the Second Circuit Court of Appeals had deferred to the DOL’s interpretation. The Supreme Court granted certiorari to resolve the split among the Circuit Courts of Appeal.
The Court agreed with the Ninth Circuit and affirmed its decision. The majority opinion refused to defer to the DOL’s interpretation based, in part, on the fact that the DOL had never initiated an enforcement action against the pharmaceutical industry despite its “decades-long practice” of treating its sales representatives as exempt. Also, until its 2009 amicus brief in the Second Circuit case, the DOL had never offered an interpretation of the law inconsistent with this industry practice. Further, the Court noted that the DOL had changed its interpretation regarding the meaning of “sale” when it submitted its amicus brief to the Supreme Court, abandoning the concept of a “consummated transaction” for the new concept that a sale required a transfer of title. The Supreme Court refused to defer to, and rejected, both interpretations.
The Court analyzed the text of the statute and the regulations the DOL had issued shortly after the enactment of the FLSA and determined that the DOL’s definition of sale was too narrow. Relying heavily on the inclusion of “a broad catchall phrase: ‘other disposition’” in the FLSA, the Court stated that the exemption includes “those arrangements that are tantamount, in a particular industry, to a paradigmatic sale of a commodity.” Given the heavy regulation in the pharmaceutical industry, particularly the prohibition against sales without prescriptions, the Court held that pharmaceutical representatives obtain the “maximum commitment” allowed by law and, therefore, they are outside salesman exempt from overtime protection.