Big Win for Big Pharma
Somewhat overlooked amid the U. S. Supreme Court’s long-awaited ruling on the Affordable Health Care Act was another decision issued at the end of the current term that represents a big labor victory for pharmaceutical companies. In a 5-4 decision, the Court interpreted the "outside sales" exemption under the Fair Labor Standards Act (FLSA) and ruled that pharmaceutical sales representatives who work more than 40 hours per week are not entitled to overtime.
The case (Christopher v. SmithKline Beecham Corp) involved a challenge under the FLSA, which requires employers to pay nonexempt employees overtime wages. One exemption to the overtime requirement involves workers employed “in the capacity of outside salesman.”
Pharmaceutical companies have long focused their direct marketing efforts on physicians. Pharmaceutical companies promote their products to physicians through a process called “detailing,” whereby employees known as “detailers” or “pharmaceutical sales representatives” try to persuade physicians to write prescriptions for the products in appropriate cases. The pharmaceutical industry has had a longstanding practice of treating detailers as exempt outside salesmen.
The plaintiffs in the lawsuit were employed by SmithKline Beecham as pharmaceutical sales representatives for roughly four years, and during that time they 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 miscellaneous tasks. Petitioners were not required to punch a clock or report their hours, and they were subject to only minimal supervision. Petitioners were well compensated for their efforts, and their gross pay included both a base salary and incentive pay.
The salesman filed suit, alleging that the company violated the FLSA by failing to pay them for overtime. The company moved for summary judgment, arguing that petitioners were employed as outside salesman and therefore were exempt from the FLSA’s overtime requirement. The federal district court agreed and granted summary judgment to the company. The U.S. Court of Appeals for the Ninth Circuit, where the case arose, affirmed the lower court.
The Department of Labor filed a friend of the court (amicus) brief before the Supreme Court, arguing that, under DOL regulations, the employees did not qualify as outside salesmen, since they did not actually make “sales” within the meaning of the regulations. DOL took the position that an employee does not make a ‘sale’ unless s/he actually transfers title to the property at issue.
Normally, the courts give deference to a federal agency’s interpretation of its own regulations. However, in this case, the Supreme Court ruled that the DOL position was “plainly erroneous” and “inconsistent with the regulation.” In addition, to defer to the DOL’s interpretation would result in “unfair surprise” as well as potentially massive liability on the company for conduct that occurred well before the DOL interpretation was announced.
The Court determined that the “detailers” made sales under the FLSA and thus are exempt outside salesmen within the meaning of the DOL’s regulations. The Court noted that its ruling is consistent with the purpose of the FLSA’s exemption – which is to ensure that workers receive fair compensation. Not lost on the Court was the fact that the workers here each earned an average of more than $70,000 per year, plus bonuses and incentives — hardly the kind of employees that the FLSA was intended to protect.