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Supreme Court: Pharmaceutical reps are outside salespersons

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in Human Resources,Overtime Labor Laws

The U.S. Supreme Court has ruled that pharmaceutical sales representatives qualify as exempt outside salespeople under the Fair Labor Standards Act (FLSA), even though they technically can’t and don’t sell anything.

Key: While this case directly affects drug companies, it could have a wider impact, since the Court also outlined the circumstances under which the Department of Labor’s (DOL) interpretation of the FLSA should be respected. The case is Christopher v. SmithKline Beecham Corp. (U.S.S.Ct., No. 11204, 2012)

When is a sale not a sale?

Federal law and regulations require that only doctors can prescribe drugs to their patients. Pharmaceutical salespeople, therefore, can’t sell their company’s prescription drugs to anyone. Instead, the salespeople, which the pharmaceutical industry calls “detailers,” visit physicians’ offices with the primary goal of obtaining nonbinding commitments from doctors to prescribe their company’s drugs.

The detailers in this case spent 40 hours per week visiting doctors’ offices and another 10 to 20 hours per week attending company events and handling other administrative tasks. They were paid a salary and a commission, with their average pay exceeding $70,000. They were not required to punch a time clock.

The detailers sued their employer, alleging that they were entitled to overtime. Employees: The ­outside salespersons’ exemption didn’t apply because they didn’t actually sell anything to anyone. Instead, they simply stimulated sales made by others. Company’s defense: The detailers engaged in selling to doctors, who were the only individuals who could prescribe drugs.

One federal appellate ruled in the em­ployer’s favor; another ruled in the employees’ favor. The Supreme Court heard the case to settle the ­difference.

When it’s a sale or “other disposition”

In advance of arguments before the Supreme Court, the DOL filed a friend-of-the-court brief in which, for the first time ever, it took a narrow view of the word “sale.” DOL: An outside salesperson is only exempt if the sale results in a change of title to property. Therefore, according to the DOL, the pharmaceutical detailers were not exempt outside salespersons.

The Court flatly rejected this interpretation, noting that employers had no notice of the DOL’s new interpretation. It decided that to defer to the DOL’s new interpretation would impose potentially massive liability on the employer for conduct that occurred long before the new interpretation was announced.

Having dispensed with the DOL’s narrow reading of the word “sale,” the Court ruled that the detailers qualified as outside salespersons under the text of the FLSA and its regulations, which, in addition to covering completed sales, includes exchanges, contracts to sell, a consignment for sale, shipment for sale or other dispositions.

Court: Obtaining nonbinding commitments from doctors to prescribe their company’s drugs was the most the detailers could do. This kind of arrangement, in the unique regulatory environment within which pharmaceutical companies must operate, comfortably falls within the catchall category of “other disposition,” the Court concluded.

OUTSIDE SALES EXEMPTION: Employers in other industries that use outside salespersons can also benefit from this decision. The FLSA exempts anyone employed in the capacity of an outside salesperson. According to the Court, the FLSA’s emphasis on “capacity” means that the focus should be on the employee’s functions as an outside salesperson within the employee’s particular industry. The key, therefore, is whether the employee’s activities qualify as “sales” in that industry.

Important factors: how your industry is structured, whether employees are hired with sales backgrounds and whether employees receive incentive pay as part of their pay packages.
 

The takeaway, if you don’t have outside salespersons

Broadly speaking, what a federal agency says about the law it administers goes. But not, according to the Court, when the announcement of a new interpretation is made for the first time in a legal brief. That’s not fair, the Court said, because employers have no warning of the change.

What counts as fair warning: In addition to revising official regulations and other administrative guidance, you can be put on notice if your entire in­­dustry becomes the subject of FLSA investigations. Tip: It’s always a good idea to keep your ear to the ground. If DOL investigators are interested in other companies in your industry, you might be next.

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