HR Management & Compliance

A Peculiar Line of Commerce: Supreme Court Weighs FLSA Status of Rx Sales Reps

The pharmaceutical industry made its case to the U.S. Supreme Court April 16 that pharmaceutical sales representatives (PSRs) are “outside salesmen” under the Fair Labor Standards Act and thus are exempt from the FLSA’s overtime requirements. A lot is at stake in the Court’s upcoming decision, since requiring overtime pay for PSRs could impose billions of dollars of potential liability on the industry. The case is Christopher v. SmithKline Beecham Corp. (No. 11-204).

FLSA’s Definition of ‘Sale’

The bulk of the oral arguments revolved around the meaning of a “sale” under the FLSA and reflected how difficult this question is, as the Court struggled with this definition.

Under section 3(k) of the FLSA, a “sale” includes “any sale, exchange, contract to sell, consignment for sale, shipment for sale or other disposition.” Regulations from the U.S. Department of Labor add that sales “include the transfer of title to tangible property, and in certain cases, of tangible and valuable evidences of intangible property.”

Does Marketing a Product Qualify as a Sale?

Thomas Goldstein, representing former SmithKline PSRs, argued that PSRs cannot be “outside salesmen” because they don’t actually make a sale. Rather, they market the drug or product to doctors, who then prescribe and sell the drug.

Paul Clement, representing SmithKline, said the PSRs were “outside salesmen” under the FLSA because they are hired as salespeople and are given sales training. During the oral argument, he stressed that requiring overtime pay for PSRs could impose billions of dollars of potential liability on the pharmaceutical industry. To counter Goldstein, Clement argued that for PSRs, making a sale is the most important part of their job. The PSRs are seeking a commitment from a doctor to prescribe. And, he added, their salary is based on the number of prescriptions written.

Justice Scalia called PSR work a “peculiar line of commerce,” because the representatives are selling a product (drugs) that they themselves are legally prohibited from selling. In other words, it is only doctors who can sell the drugs, since only doctors can write prescriptions for them. While acknowledging that the restriction places PSRs in an odd place when “selling,” Goldstein pointed out that the FLSA draws these strange lines frequently. For example, he said, movie theater employees are exempt but playhouse employees are not.

Justice Kagan found DOL’s regulation (that a “sale” includes the transfer of title to property) confusing and possibly inconsistent with FLSA section 3(k). As she noted, in consignments (which section 3(k) includes in the definition of “sale”), there isn’t an actual transfer of title. Justice Scalia quickly agreed, pointing out that consignment sales don’t even have an agreement to transfer title. Rather, he said, consignments are like “a future contingent.”

Keep an Eye Out for Final Decision

The difficulty of the questions presented clouded most of the Justices’ stances on the topic (though Justice Scalia, predictably, did say that in his eyes, PSRs looked like salesmen). In any regard, employers that frequently interact with government agencies and/or rely on agency interpretations should keep an eye on this case. The Court’s decision is expected in late June 2012.

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