June 26, 2012 / Law Alert

Employment law perspectives: Supreme Court holds pharmaceutical sales reps qualify as outside sales persons under FLSA

On June 18, 2012, in a 5-4 decision, along traditional lines, the Supreme Court, resolved a split between the 2nd and 9th Circuits, and sided with the 9th Circuit in Christopher v. SmithKline Beecham Corp. Justice Alito, writing for the majority, held that the Department of Labor’s most recent interpretation of its own regulation on the issue, which it set forth for the first time in a series of amicusbriefs, was not entitled to deference nor was it persuasive. The opinion detailed the history of the DOL’s position on the regulation and focused on its most recent interpretation that

“[a]n employee does not make a ‘sale’ for the purpose of the ‘outside salesman’ exemption unless he actually transfers title to the property at issue.”

The Court noted that the DOL announced its view that pharmaceutical salesmen are not exempt for the first time in 2009, and further noted that not only had it announced its new view in 2009, but had also changed its reasoning since that time to support its argument in the SmithKline case. The Court found it significant that the pharmaceutical industry had a “decades long” practice of classifying these employees (which currently is estimated as a work force of 90,000) as exempt, and the DOL never initiated any enforcement action or otherwise identified that it was an unlawful practice, indicating its acquiescence to the classification. In denying Auer deference, the Court stated that imposition of the new interpretation would:

  1. Impose “potentially massive liability” for conduct that occurred long before the interpretation was announced;
  2. Undermine the principle of providing “fair warning” to regulated parties of the nature of the unlawful conduct; and
  3. Result in the type of “unfair surprise,” against which the Court has long warned.

The Court further concluded that the DOL’s interpretation was unpersuasive because it lacked the “hallmarks of thorough consideration;” being first announced in amicusbriefs with no opportunity for public comment. Accordingly, the Court applied its own “traditional tools of interpretation.” The case turned on the interpretation of “making sales” and the Court concluded that the pharmaceutical salesmen process of securing non-binding commitments from physicians to prescribe drugs as medically appropriate was enough to qualify as an outside salesperson exempt from overtime.

This case is being viewed as a victory for the pharmaceutical industry, however, that victory might not be permanent. If this exempt classification for pharmaceutical salesmen is a priority for the DOL, it has a blue print for (including in Justice Breyer’s dissent) and can cure the deficiencies cited by the Court for deference and persuasiveness, and continue to pursue the issue on the merits.