Jul 16, 2012

Payment of Pharmaceutical Sales Representatives Under the Fair Labor Standards Act

The United States Supreme Court recently issued a decision holding that pharmaceutical corporations’ sales representatives (“PSRs”) are exempt from overtime pay under the Fair Labor Standards Act (“FLSA”). In a 5-4 decision, the Court held that PSRs are not entitled to overtime premiums because they fall within the “outside sales” exemption of the FLSA.

The FLSA provides certain exemptions for minimum wage and overtime pay. The Department of Labor (“DOL”) regulations state that these exemptions apply to workers “customarily and regularly engaged away from the employer’s place or places of business.” The regulations also reference a statute which defines the term “sale” as “any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.”

In Christopher v. SmithKline Beacham, two PSRs worked for SmithKline, a pharmaceutical manufacturer and distributor, and were responsible for calling on physicians in an assigned sales territory to discuss the features, benefits, and risks of SmithKline drugs. The objective of the two PSRs was to obtain a nonbinding commitment from the physicians to prescribe SmithKline drugs to their patients when appropriate. The PSRs worked a normal 40 hour work week, and spent an additional 10 to 20 hours returning phone calls, responding to emails, and doing other miscellaneous tasks.

The two PSRs sued SmithKline for failing to pay them overtime. The two PSRs relied on a similar case from the Second Circuit Court of Appeals, In re Novartis Wage and Hour Litigation. In Novartis, the DOL stated that the term “sale” only applies to a transaction involving a “transfer of title,” and no transfer of title to a product was effected because the PSRs only obtained nonbinding commitments to prescribe SmithKline drugs. SmithKline responded by asserting that both PSRs were exempt from overtime pay as they were “outside salesmen” under the FLSA. SmithKline further asserted that a broader interpretation of the word “sale” should be adopted to include the actions of soliciting commitments from physicians to prescribe certain drugs. The district court agreed with SmithKline’s position. The Ninth Circuit subsequently affirmed the district court’s decision.

The United States Supreme Court held that the definition of “sale” in the DOL regulations was broad enough to include the action of obtaining nonbinding commitments from physicians to prescribe SmithKline drugs. The Court reasoned that to adopt the narrow interpretation of the Second Circuit would be “difficult to reconcile with the broad language of the regulations and the statutory definition of ‘sale.'” Generally, the Court would give deference to the DOL in its interpretation of the word “sale;” however, the pharmaceutical industry had little reason to suspect that their long history of treating PSRs as exempt outside salesmen was in violation of the FLSA, and to rely on the DOL’s recently altered interpretation would create precisely the kind of “unfair surprise” that the Court aims to prevent. The Court also noted that the PSRs had all the markings of salesmen as they were hired for their sales experience, received incentive-based pay, and were trained to “close sales” by obtaining the maximum commitment possible from the physician.

Furthermore, the Court held that the exemption of PSRs aligned with the purpose of the FLSA’s exemption for outside salesmen. The PSRs made in excess of $70,000 per year at the time they brought their claim. The Court stated that the exemption was not meant to protect employees who “typically earned well above the minimum wage” and enjoyed other benefits that set them apart from workers not entitled to the exemption. Moreover, exempt employees perform a type of work where it is “difficult to standardize any time frame and could not be spread to other workers after forty hours in a week, making compliance with the overtime provisions difficult.” It would be difficult for pharmaceutical companies to treat the PSRs as hourly employees without drastically changing the nature of the position.

This decision may be considered a victory and a return to normalcy for a pharmaceutical industry that had long considered PSRs as exempt under the FLSA. Other industries with similarly situated sales employees may be affected as well. The Court’s decision effectively overrules the Second Circuit case that was highlighted in the client alert from September 13, 2010. Finally, the Court’s ruling is a strong pronouncement that the DOL may not use ad hoc interpretations in order to change the scope of its regulations.

If you have any questions regarding compliance with the Fair Labor Standards Act, please do not hesitate to contact your employment counsel at Smith, Gambrell, & Russell, LLP.

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