On June 18, 2012, a 5-4 majority of the United States Supreme Court delivered a pointed rebuke to the U.S. Department of Labor for its changing position on the Fair Labor Standards Act’s outside sales overtime exemption as applied to the pharmaceutical industry. The industry practice for decades has been to treat pharmaceutical sales representatives as exempt, with no enforcement action by the DOL. In deciding Christopher v. SmithKline Beecham, the Court ruled that pharmaceutical sales representatives were in fact exempt outside salesmen under the FLSA and took the DOL to task for its shifting interpretations of its regulations and for the "unfair surprise" of burying its first public mention of a new, more restrictive interpretation in 2009 amicus briefs to lower federal appeals courts. The Court noted that employers should not be subject to significant liability when the agency decides to change course after decades of acquiescing to the industry practice. This decision is good news for all employers, as the DOL's shifting opinions and interpretations are not limited to the outside sales exemption.
By way of background, the FLSA contains an exemption from minimum wage and overtime requirements for outside sales employees. The FLSA does not define "outside sales." The DOL issued regulations in 1938, which as applied to this exemption have remained largely unchanged. The regulations provide that an employee is exempt when (1) the employee's primary duty is "making sales" or obtaining orders or contracts for services and (2) the employee is customarily and regularly engaged away from the employer's place of business. "Sales" includes "any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.” In addition, promotional work that is performed incidental to and in conjunction with the employee's own outside sales or solicitations is exempt work. Promotional work that is related to sales made by someone else is not exempt outside sales work.
The sales representatives at issue in this case were responsible for calling on physicians and their primary objective was to obtain a "nonbinding commitment" from the physician that the physician would prescribe the pharmaceutical company's drugs in appropriate cases. Given the federal regulation of prescription drugs, a nonbinding commitment to prescribe the drugs in appropriate circumstances was the most the sales representatives could request.
The DOL initially argued in amicus briefs to the Second and Ninth Circuits that the pharmaceutical sales representatives were not exempt because there was no "consummated" transaction. The agency then shifted course and argued before the Supreme Court that "an employee does not make a 'sale' unless he actually transfers title to the property at issue." The Court held that the DOL's interpretation of its regulations was not entitled to deference because it did not give employers "fair warning." The Court then found the interpretation to be "quite unpersuasive" given the broad definition of "sale" in the regulations and the inconsistency of the DOL's own interpretations.
Although limited to the outside sales exemption, this decision carries broader implications for all employers. As many of our readers are aware, the DOL has recently frequently shifted positions, such as the 2010 Administrator Interpretation reversing its longstanding opinion that mortgage loan officers were exempt under the FLSA. The decision suggests that when presented with cases involving attempts by federal agencies to alter accepted regulatory practices, the Court will place significant value on the predictability of federal regulatory positions, and will not give new agency positions – particularly those it sees as having been sprung on the regulated community – much if any deference.
A word of caution is in order, however. This decision focused on a narrow issue regarding the outside sales exemption and did not address other requirements of that exemption or any state law distinctions that may apply (for example, the Maine exemption for outside sales differs from federal law). As always, employers should take care to analyze all of a position’s duties before classifying it as exempt under state or federal law.