U.S. Supreme Court Holds that Pharmaceutical Sales Representatives are Exempt from Overtime under the Fair Labor Standards Act's Outside Sales Exemption

In Christopher v. SmithKline Beecham Corp., 132 S. Ct. 2156 (June 18, 2012), the U.S. Supreme Court held, in a 5-4 decision, that pharmaceutical companies are not required to pay overtime to their sales representatives.

The key issue in the case was whether the pharmaceutical sales representatives fell within the Fair Labor Standards Act's ("FLSA") outside sales exemption. By law, pharmaceutical representatives cannot sell drugs. As a result, the sales representatives simply secure non-binding commitments from physicians to prescribe their companies' drugs in appropriate circumstances.

The FLSA defines "sale" as "any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition." The U.S. Department of Labor ("DOL") advocated a narrow definition, claiming that the representatives did not fall within the exemption because a sale should be defined as a transfer of title and they did not transfer title to the drugs they marketed.

Initially, the Court refused to give any deference to the DOL's position that the representatives did not fall within the exemption. The Court recognized that, generally, it must defer to an agency's interpretation of its own regulations; however, the Court ruled that there were strong reasons for withholding deference in this case.

The Court observed that the DOL first articulated its "consummated sale" position in an amicus brief it filed in 2009, and that after the Court granted certiorari, the DOL took the position that a sale had to involve "a transfer of title." The DOL also had no explanation for why it had accepted the industry's practice for decades without pursuing an enforcement action sooner. The Court explained that, "[i]t is one thing to expect regulated parties to conform their conduct to an agency's interpretation once the agency announces them; it is quite another to require regulated parties to divine the agency's interpretation in advance or be held liable when the agency announces its intention for the first time in an enforcement proceeding and then demands deference."

With respect to the merits of the case, the Court ruled that the DOL's interpretation "was quite unpersuasive." The Court focused on the term "other disposition" from the FLSA's definition of "sale" and reasoned that, given the uniquely regulated industry, pharmaceutical sales representatives "made sales for purpose of the FLSA" by obtaining non-binding commitments from physicians to prescribe their drugs. The Court also noted that the representatives bore all the indicia of salesmen, earned over $70,000 per year and, therefore, "are hardly the kind of employees that the FLSA was intended to protect."

This decision was a huge victory for the pharmaceutical industry. The decision is also helpful to employers in a more general sense, in that (a) it limited the DOL's ability to claim deference, and (b) the Court did not apply a rigid, formulaic approach, but instead, practically analyzed the employees' responsibilities within the context of their particular industry.