Larkin Hoffman Daly & Lindgren Ltd.

One of the most common wage and hour questions companies have is whether their employees are exempt from overtime requirements under the Fair Labor Standards Act, 29 U.S.C. 201, et seq. (the “FLSA”). The FLSA generally requires the payment of a minimum wage and overtime pay to employees for each hour worked over 40 hours in a week. The FLSA and the Department of Labor’s (“DOL”) implementing regulations, however, contain numerous exemptions for workers ranging from highly paid employees to forestry workers. Employers often assume that the exemptions are broader than they are. However, the exemptions are specific and narrow. Many times employers will look at the name of an exemption and determine that a certain class of workers falls under the exemption without further analysis. For example, some companies have assumed that the “outside salesman” exemption applies to any salesperson. In reality, each of the exemptions has several specific requirements which must be met.

On June 18, 2012 the Supreme Court of the United States held that pharmaceutical sales representatives are exempt outside sales employees under the FLSA. The case is captioned Christopher v. SmithKline Beecham Corp., No. 11-204 and was on appeal from the Ninth Circuit. The Ninth Circuit held that the outside sales exemption applied to such employees and declined to follow a contrary decision by the Second Circuit Court of Appeals against drug maker Novartis, In re Novartis Wage and Hour Litigation, No. 09-0459 (July 6, 2010). The Second Circuit held that pharmaceutical salespersons did not qualify for either the outside sales exemption or the administrative employee exemption and were therefore entitled to overtime pay. In addition, a unanimous three-judge panel of the Chicago-based Seventh Circuit Court of Appeals recently held that pharmaceutical salespersons were “administrative employees” exempt from the FLSA’s overtime requirements in the companion cases Schaefer-LaRose v. Ely Lilly & Company, No. 10-3855 and Jirak v. Abbott Laboratories, Inc., Nos. 11-1980, 11-2131. The Christopher case did not address the administrative exemption, but that question is essentially moot as a result of the Court’s application of the outside sales exemption.

In Christopher, the Court’s decision was reached on a 5-4 vote with Justice Alito delivering the opinion of the Court joined by Chief Justice Roberts and Justices Scalia, Kennedy, and Thomas. Justice Breyer dissented, joined by Justices Ginsburg, Sotomayor, and Kagan. The Court first decided that the DOL’s interpretation of the meaning of the exemption should not be given deference. The DOL’s position that pharmaceutical sales representatives are not exempt was first articulated in an unsolicited “friend of the court” brief filed with the Second Circuit in the Novartis case in 2009. For decades, drug companies have treated their sales representatives as exempt, and this was the first time that the DOL has disagreed. Moreover, the DOL’s position that salespersons must “actually transfer[] title to the property at issue[]” is at odds with the DOL’s regulations which require only a sale, consignment for sale, or “other disposition.” The Court reasoned that applying the exemption only to actual sales renders the remainder of the regulation meaningless. The Court also observed that were it to adopt the interpretation suggested by the DOL and the dissent, a salesperson whose assistant handles the final paperwork of a sale is not exempt. Presumably, the assistant would be exempt. This situation feeds into the Court’s observation that pharmaceutical sales representatives in general are well compensated and not the type of employee who the FLSA was intended to protect. The Court noted that the average annual compensation for pharmaceutical sales representatives is approximately $90,000.

The dissent contended that the employees at issue were more akin to “sales promotion men” who pave the way for the actual salesperson. But in this case, there would be no actual salesperson under the dissent’s interpretation. Rather, these employees accomplish all that a pharmaceutical company can to cause its products to be purchased. According to the dissent, this reasoning would push the exemption too far to exempt any employee who does as much as he or she can in a particular position to secure the eventual purchase of the employer’s products. However, the Court points out that it is the particulars of this industry which makes it impossible for any person to fully consummate a purchase. The Court also indicated that the pharmaceutical industry is unique because it is not legal for a salesperson to directly make a sale. The most a salesperson can do is secure a non-binding commitment from a doctor to prescribe the company’s drugs which can only ultimately be sold to a patient by a pharmacy.

This issue will likely affect non-pharmaceutical companies as well as pharmaceutical companies. Any employee who promotes products to consumers or to intermediaries but does not directly consummate sales could be affected. It is not clear where that line will ultimately be drawn in other industries, but the issue will surely be addressed in the future. The general proposition that an exempt salesperson need not actually transfer title to property should apply to all industries. For now, drug makers can breathe a sigh of relief.