U.S. Supreme Court Affirms Exempt Status of Pharmaceutical Sales Representatives
June 20, 2012
On June 18, 2012, the U.S. Supreme Court affirmed a decision of the Ninth Circuit Court of Appeals finding that pharmaceutical sales representatives at GlaxoSmithKline fall within the outside sales exemption from the overtime pay requirements of the Fair Labor Standards Act ("FLSA"). As reported in a previous blog post, the Second Circuit Court of Appeals had reached the opposite conclusion in July of 2010, finding that pharmaceutical sales representatives employed by Novartis were not FLSA-exempt and that a class of more than 7,000 current and former employees in that position were entitled to pursue their overtime claims. The Supreme Court's 5-4 decision resolves the split in the Circuit Courts on the scope of the FLSA's outside sales exemption and addresses the amount of deference owed to the Secretary of Labor's interpretation of the U.S. Department of Labor's regulations promulgated under the FLSA.
In amicus briefs filed with both the Second and Ninth Circuits, the Secretary of Labor initially took the position that a "sale" as described in the regulations required a "consummated transaction directly involving the employee for whom the exemption is sought." Because pharmaceutical sales representatives promote drugs to physicians in exchange for nonbinding commitments to prescribe the drugs in appropriate cases, the Secretary argued that they did not "make sales" and, accordingly, could not qualify for the outside sales exemption. After the Supreme Court granted certiorari, however, the Secretary argued instead that an employee does not make a sale unless he "actually transfers title to the property at issue."
Although an agency's interpretation of its own ambiguous regulations is normally entitled to deference, the majority found "strong reasons" for not deferring to the Secretary's interpretation in this instance. Specifically, the majority found that the Secretary's current interpretation would impose potentially massive liability on employers without fair warning, especially given the U.S. Department of Labor's apparent acquiescence in the longstanding pharmaceutical industry practice of treating sales representatives as exempt. In addition, the majority found that the Secretary's interpretation was not persuasive in its own right for a number of reasons, including that it was first announced in a series of amicus briefs with no opportunity for public comment, that the Secretary's initial interpretation argued before the Second and Ninth Circuits had proven to be untenable, and that it was "flatly inconsistent" with the FLSA's definition of "sale."
The majority held that the FLSA's statutory language regarding the outside sales exemption called for a functional inquiry, taking into consideration an employee's responsibilities in the context of the particular industry in which he or she works. In light of the unique regulatory environment within which pharmaceutical companies operate, including the prohibition against dispensing certain drugs without a physician's prescription, the majority found that the sales representatives' promotional efforts to obtain non-binding commitments from physicians was "tantamount . . . to a paradigmatic sale of a commodity" within the pharmaceutical industry. Furthermore, the majority found that its holding comported with the apparent purpose of the FLSA's exemption, because pharmaceutical sales representatives who typically earn over $70,000 per year are hardly the type of employees the FLSA was intended to protect.
