September 18, 2012 Top Story

Death of a Salesman Exemption

Supreme Court finds salesmen are exempt under FLSA even when they don't "sell"

Teresa Rider Bult

Pharmaceutical sales representatives are exempt from the overtime provisions of the Fair Labor Standards Act (FLSA). To reach that conclusion, the U.S. Supreme Court rejected the Department of Labor’s (DOL) interpretation of its own regulations and found that the sales representatives qualify as outside salesmen under the act. Christopher v. SmithKline Beecham Corp. [PDF]

FLSA Overtime Exemption

The FLSA, enacted in 1938, requires that employees be paid 1.5 times their hourly wage for working more than 40 hours in a week. Among the exemptions are outside sales people whereby the primary duty of an employee’s position is making sales that customarily and regularly occur away from the employer’s offices. Over the last two decades, a multitude of FLSA collective actions have alleged that companies improperly classified their employees under this standard.

Debate over Classification of Sales Representatives as Exempt

In SmithKline, pharmaceutical sales representatives sued their former employer for overtime pay, claiming they could not be considered outside salesmen under the FLSA because they did not really “make sales.” They argued instead that they merely educated physicians about the drugs and encouraged the doctors to prescribe them. The U.S. District Court for District of Arizona dismissed the case on summary judgment, finding pharmaceutical sales representatives were exempt. The U.S. Court of Appeals for the Ninth Circuit agreed and found the representatives fit squarely within the exemption [PDF].

The Second Circuit considered this precise issue in 2009 in In re Novartis Wage and Hour Litigation. It reached the opposite conclusion, finding that the exemption did not apply. Thus, the case was ripe for U.S. Supreme Court intervention.

Significantly, the first time the DOL had taken a position on the question was in 2009, in an uninvited amicus brief in In re Novartis, where it posited that making sales meant to “consummate a transaction or transfer title.” If this definition were followed, it would eliminate the applicability of the overtime exemption for pharmaceutical sales representatives, who did not finalize any real sale. Up until that time, the DOL had taken no position on the issue and had taken no enforcement action against the pharmaceutical industry, which had for decades considered their sales representatives to be exempt and correspondingly not paid them overtime.

Outside Sales Does Not Mean Conventional Selling

Ultimately, the Supreme Court sided with the Ninth Circuit in finding the pharmaceutical sales representatives were properly classified as exempt outside salesmen under the FLSA. In doing so, the Court scrutinized the wording of the phrase “making sales” to determine if the pharmaceutical representatives conducted the activity anticipated by the act. Using traditional tools of interpretation, the Court found the term “sale” not only included conventional sales, but broader categories, evidenced by the use of the phrase “sales. . . or other disposition” in the definition. The majority refused to limit the term “making sales” to a precise literal construction, noting such an interpretation would be impossible in the heavily regulated pharmaceutical industry, where sales representatives are prohibited from directly “selling” to consumers or physicians.

While the Court spent a good bit of time deconstructing semantics, its ultimate decision relies more on fairness principles. The majority concludes that these positions were simply not the type of positions the FLSA aimed to protect. The opinion notes that the individuals were highly compensated, required substantial training and independence, and their uncertain hours meant overtime hours were frequent. The Court also concludes that key aspects of these individuals’ positions were “fundamentally incompatible” with treating them as hourly employees.

DOL Agency Deference Rejected

The Court specifically rejected the idea that it should defer to the DOL’s position. The typical rule, created by the Supreme Court’s 1984 decision in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., is that the Court will defer to an agency’s interpretation of its own ambiguous regulation. Both the majority and dissent in SmithKline agreed that deference was not warranted under these circumstances, because the DOL’s “conspicuous inaction” on the “industry’s decades-long practice” lulled the pharmaceutical industry into believing these positions were exempt, and there was no “fair warning” of the change in position through notice-and-comment rulemaking or other procedures. Rather, the first hint of the DOL’s position did not come until its amicus brief was filed in the Second Circuit in 2009.

A 2012 Seventh Circuit case had found pharmaceutical sales reps were exempt using a different exemption category—the administrative exemption. This decision mirrored a Third Circuit decision [PDF] regarding the application of the administrative exemption to these positions.

Pharmaceutical Industry Feels Vindicated

“Nearly every major pharmaceutical company has been sued by their pharmaceutical reps challenging the exempt status,” notes Maureen R. Knight, Fairfax, VA, membership subcommittee chair of the ABA Section of Litigation’s Employment and Labor Relations Law Committee. That includes Novartis, who settled a similar lawsuit in 2012 for $99 million after an adverse decision in the Second Circuit. Thus, “wage and hour litigators on both sides were anxiously awaiting the SmithKline Court’s decision, which was to be the first case decided by the Supreme Court interpreting one of the common so-called white-collar exemptions,” says Knight. Now, post-decision, Knight observes the pharmaceutical industry has a “precious rarity” in the wage and hour universe: “a conclusive decision by the High Court with regard to an exempt classification.”

More Clarity or More Ambiguity?

While some litigators agree the decision provides some certainty for the pharmaceutical industry, they believe it may provide ambiguity and additional litigation in other industries. “Now, it is impossible for anyone to predict with any certainty where the parameters of a ‘sale’ are at this point,” says Alan G. Crone, Memphis, cochair of the Section of Litigation’s Employment Law Subcommittee of the Committee on Class Actions and Derivative Actions. “What is clear is that you don’t have to ‘sell’ anything to fit within the sales exemption,” he says.

Thus, Crone predicts other companies in varying industries will attempt to reclassify sales positions as exempt to avoid overtime payments, which will result in a “scramble of Circuit opinions to interpret SmithKline’s parameters.” As a result, Crone believes the decision has more far-reaching impact beyond the pharmaceutical industry than the Supreme Court may have intended.

Rejection of Agency Deference

Crone opines that the decision will have less impact on the pharmaceutical industry and exemptions generally than it will have on the rule of law regarding regulatory deference. “There is a reason the agency’s interpretation of its own regulation is typically followed—because the agency is in the best position to be able to interpret what was meant,” says Crone. “Now, the Supreme Court has completely undermined the deference standard, opening the door for companies and courts to ignore agency regulations and come up with their own interpretation on a myriad of issues,” he notes.

Knight agrees that the impact may be far-reaching. “The Department of Labor under the Obama administration has been viewed as the most aggressive and employee-favorable DOL in decades, eliminating the decades-long practice of issuing opinion letters (which were most often addressed to employers to assist them in making wage hour decisions), authoring numerous amicus briefs in favor of employees in misclassification cases, and referring certain employees who lodge complaints with the DOL (but whom the DOL believes it may not have the time or resources to assist) to trial lawyers,” says Knight. She believes the Supreme Court’s unequivocal rejection of the DOL’s interpretation in the SmithKline case may be considered a major blow to the DOL’s agenda.

Employers Cautioned Not to Take Case Holding Too Far

“Employers should be cautioned, however, that this ruling does not mean that they are free to disregard DOL interpretations,” says Knight, “which, given the very broad statutory language of the white-collar exemptions themselves, represent the majority of the guidance on which courts will generally rely in making exempt classification rulings.” Instead, she points out, “the rule of law is still that deference is given to agency interpretations except in special circumstances.”

Employers should keep in mind that the Supreme Court’s decision only addressed federal law. It therefore does not necessarily impact the wage-hour laws of states. While many state minimum wage and overtime laws mirror or give deference to the federal law, not all do.

Teresa Rider Bult is an associate editor for Litigation News.

Keywords: Fair Labor Standards Act, outside sales, wage and hour, overtime

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