HR Management & Compliance

U.S. Supreme Court rules drug reps are exempt as “outside salesmen”

By Nancy Williams

Pharmaceutical representatives who persuade physicians to prescribe specific drugs don’t make any actual sales. They can’t because the products they promote can be sold legally only through a doctor’s prescription to an individual patient. Yet for years, it has been a common industry practice to categorize such employees as outside sales representatives under the Fair Labor Standards Act (FLSA) and thus exempt from federal overtime pay requirements.

A lawsuit by pharmaceutical reps challenged the practice, raising the specter of huge potential overtime pay liability for the industry. Today that concern evaporated with the U.S. Supreme Court’s 5-4 ruling that the historical classification of pharmaceutical representatives as outside sales reps is correct under the FLSA.

The case was filed by former employees of GlaxoSmithKline, who claimed they frequently put in 50 hours a week or more calling on physicians and engaging in promotional activities. They received both base and incentive compensation amounting to more than $70,000 per year but no additional pay for overtime hours. The U.S. Department of Labor (DOL), which enforces the FLSA, chimed in to support their claims.

The Court’s decision turned largely on whether to defer to the DOL’s position. The department argued that employees are properly classified as outside sales representatives only if they actually consummate sales transactions. By law, pharmaceutical reps couldn’t sell products directly and could only encourage doctors to prescribe them. Thus, according to the DOL, they weren’t exempt from FLSA overtime requirements.

The Supreme Court didn’t buy the DOL’s position. Pharmaceutical reps are hired based on sales expertise, and their efforts are expected to result in product sales. They have historically been paid based on their success in getting physicians to prescribe particular products and have consistently been treated as exempt from overtime. Despite common knowledge of this industry practice, the DOL has never filed an FLSA enforcement action on behalf of pharmaceutical reps. To the Court, the history of nonenforcement amounted to acquiescence by the department to the commonsense industry practice.

Adopting the DOL’s apparent change of course at this point would impose an “unfair surprise” on the pharmaceutical industry. The Court also observed that the highly compensated reps were “hardly the kind of employees that the FLSA was designed to protect.” The Court affirmed the earlier decision of the U.S. 9th Circuit Court of Appeals. Christopher v. SmithKline Beecham Corp. dba GlaxoSmithKline, Case No. 11-204 (June 18, 2012).

Lessons for Employers
GlaxoSmithKline successfully upheld the exempt classification of its sales reps. But interpreting the FLSA exemptions can be tricky. Always be certain your determination of the exempt status of a particular position is based on the actual duties of the position and on the salary basis for compensation where applicable. Don’t make the mistake of some employers and assume that an employee is exempt simply because she is paid a salary rather than by the hour. If you’re not sure of the FLSA exemption requirements, the DOL’s website can provide answers to many common questions. But as this case tells us, the department’s interpretations aren’t infallible. For more tailored advice, consult your employment lawyer.

Nancy Williams is a partner with Perkins Coie LLP in Seattle and a former editor of Washington Employment Law Letter. She frequently writes about employment law developments in the 9th Circuit.