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U.S. Supreme Court Rejects Overtime Claims in FLSA Ruling

By Allen Smith  6/18/2012

Rejecting the U.S. Department of Labor’s interpretation of Fair Labor Standards Act (FLSA) regulations, the U.S. Supreme Court on June 18, 2012, ruled 5-4 in Christopher v. SmithKline Beecham Corp. that pharmaceutical sales representatives are employed in the capacity of outside salespeople and are exempt from the FLSA’s overtime compensation requirement. The decision sheds new light on the nature of work that may be exempt from the FLSA's reach.

“This decision casts a long shadow well beyond the pharma industry, as all businesses that are subject to federal regulations may now be emboldened to challenge a federal agency's interpretation of its own ambiguous regulations,” said Gary Friedman, an attorney with Weil, Gotshal & Manges in New York. “This is a ground-breaking decision that we will see cited in many future cases.”

From 2003 to 2007, Michael Christopher and Frank Buchanan, the plaintiffs, were pharmaceutical sales representatives for SmithKline Beecham Corp. (now a unit of Britain's GlaxoSmithKline Plc.). They worked 40 hours each week in the field in their assigned sales territory calling on physicians, promoting the company’s prescription drugs by providing information to physicians about the company’s products in hopes they would persuade the physicians to write prescriptions for the products. They also worked 10 to 20 hours each week attending events, reviewing product information, returning phone calls, responding to e-mails and performing other miscellaneous tasks. They sued SmithKline, alleging that it violated the FLSA by failing to compensate them for overtime.

In an opinion written by Justice Samuel Alito Jr., the court agreed with SmithKline that the plaintiffs were exempt outside salespeople.

The court began by noting that the plaintiffs were not required to punch a clock or report their hours and were subject to only minimal supervision. It also noted that even though they did not receive overtime pay, they were well compensated for their efforts—Christopher earned $72,000 a year and Buchanan earned over $76,000.

No Deference to DOL’s Interpretation

The court next determined that pharmaceutical sales representatives are outside salespeople despite the U.S. Department of Labor's (DOL) argument first announced in an amicus brief in 2009 that they are not exempt.

The plaintiffs invoke DOL’s ambiguous regulations to impose potentially massive liability for conduct that occurred well before that interpretation was announced, which isn’t fair, the court determined.

Moreover, the court found the department’s interpretation of its regulations “quite unpersuasive.” Its argument that a sale requires a transfer of title “plainly lacks the hallmarks of thorough consideration.” The court noted that there was no public comment on the DOL’s view. And it observed that the DOL had changed its argument before the appeals courts that a sale requires a consummated transaction to its view that there must be a transfer of title for there to be a sale.

“This new interpretation is flatly inconsistent with the FLSA, which defines ‘sale’ to mean a ‘consignment for sale.’ A ‘consignment for sale’ does not involve the transfer of title,” the court stated.

Court’s Textual Interpretation


Since it did not defer to the DOL’s interpretation, the court then analyzed the text of the statute to determine if the plaintiffs are exempt.

First, it noted that the provision that establishes the overtime salesman exemption provides one “interpretive clue,” exempting anyone employed in the capacity of an outside salesman. “The statute’s emphasis on the ‘capacity’ of the employee counsels in favor of a functional, rather than a formal, inquiry, one that views an employee’s responsibilities in the context of the particular industry in which the employee works,” the court stated.

In addition, the regulations’ definition of “sale”—that “ ‘sale’ or ‘sell’ includes any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition”—contains three further clues. The definition is introduced with the verb “includes” instead of “means.” And “sale” is modified by the word “any.” There also was a broad catchall phrase in the regulation, drawn from the text of the statute: “other disposition.”

“The specific list of transactions that precedes the phrase ‘other disposition’ seems to us to represent an attempt to accommodate industry-by-industry variations in methods of selling commodities,” the court stated. “Consequently, we think that the catchall phrase ‘other disposition’ is most reasonably interpreted as including those arrangements that are tantamount, in a particular industry, to a paradigmatic sale of a commodity.”

The court concluded that the plaintiffs made sales for purposes of the FLSA. It stated that “Obtaining a nonbinding commitment from a physician to prescribe one of respondent’s drugs is the most that petitioners were able to do to ensure the eventual disposition of the products” that SmithKline sells.

Moreover, it noted that the plaintiffs were hired for their sales experience, and were trained to close each sales call by obtaining the maximum commitment possible from the physician. They worked away from the office with minimal supervision and were rewarded for their efforts with incentive compensation.

“Our holding also comports with the apparent purposes of the FLSA’s exemption for outside salesmen,” the court concluded. “The exemption is premised on the belief that exempt employees ‘typically earned salaries well above the minimum wage’ and enjoyed other benefits that ‘set them apart from the nonexempt workers entitled to overtime pay.’ ”

The court stated that the plaintiffs—“each of whom earned an average of more than $70,000 per year and spent between 10 and 20 hours outside normal business hours each week performing work related to his assigned portfolio of drugs in his assigned sales territory—are hardly the kind of employees that the FLSA was intended to protect.”

Dissent


Justice Stephen Breyer wrote a dissent, joined by Justices Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan. He first agreed with the majority that the DOL’s interpretation of its regulations do not merit any especially favorable weight, and so independently examined the statute’s language and the regulations. But, based on his examination of both, he determined that a pharmaceutical sales representative, also called a “detailer,” is not an outside salesman.

“Unless we give the words of the statute and regulations some special meaning, a detailer’s primary duty is not that of ‘making sales’ or the equivalent,” he wrote. “A detailer might convince a doctor to prescribe a drug for a particular kind of patient. If the doctor encounters such a patient, he might prescribe the drug. The doctor’s client, the patient, might take the prescription to a pharmacist and ask the pharmacist to fill the prescription. If so, the pharmacist might sell the manufacturer’s drug to the patient, or might substitute a generic version. But it is the pharmacist, not the detailer, who will have sold the drug.”

Decision's Impact

Richard Alfred, an attorney with Seyfarth Shaw in Boston, said that as the “first case where the Supreme Court considered any of the so-called white collar impolications,” the decision has broad implications.

“I think the opinion provides a blueprint for how the court will deal with ambiguous terms” in the FLSA, he told SHRM Online.

Regardless of which exemption is at issue, if the DOL changes its position in a way that conflicts with prior interpretation without public comment, the new position will not, he asserted, be entitled to courts' deference.

So, under the administrative exemption, the DOL administrator's interpretation that mortgage loan officers were not exempt no longer is entitled to deference, he maintained.

Alfred said he attended oral argument in the case, and said that the justices were very unhappy with the DOL's position that policy changes announced in amicus briefs are entitled to deference. Both the majority and dissent agreed that they were not entitled to deference, he emphasized.

“I have no doubt whatsoever that the plaintiffs' bar will attempt to have courts construe Christopher narrowly,” Alfred added. But he said the decision is “very broad,” particularly its consideration of whether the amicus briefs were entitled to deference. The Supreme Court now says “if you are going to change old rules, you have to do this through rulemaking” that gives the public the opportunity to comment.

Allen Smith, J.D., is manager, workplace law content, for SHRM.  

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