Supreme Court Overtime Exemption Decision Reins In DOL

June 21, 2012

In a ruling that may have broad implications for all Fair Labor Standards Act (FLSA) white-collar exemptions, the U.S. Supreme Court held in a 5–4 decision that pharmaceutical sales representatives are not subject to overtime pay pursuant to the FLSA. Christopher v. SmithKline Beecham Corp. (S.Ct. June 18, 2012).

Christopher Decision

The FLSA establishes minimum wages and generally requires payment of an overtime rate of time-and-a-half for all hours worked over 40 in a given workweek for “non-exempt” employees. However, the overtime requirements do not apply to employees working in “exempt” jobs, including in “the capacity of an outside salesman.”

In Christopher, the petitioners Michael Christopher and Frank Buchanan worked for SmithKline Beecham as pharmaceutical reps, meeting with doctors in their clinics and offices and obtaining “nonbinding commitments” from medical providers to prescribe SmithKline’s drugs when appropriate. The reps never directly sold prescription drugs to doctors, pharmacies or patients and did not enter into contracts or directly transfer products. The U.S. Department of Labor (DOL) argued in amicus briefs in two Circuit Courts of Appeal for a very restrictive view of the outside sales exemption: that a “sale” requires a consummated transaction directly involving the employee at issue. Then in the Supreme Court, DOL changed to an even more restrictive position and argued that the employee “does not make a ‘sale’. . .unless he actually transfers title to the property at issue.”

In holding that the reps’ work obtaining commitments from physicians to prescribe prescription medications qualified them as “outside salesmen”, the Court noted that the reps were hired on the basis of their sales experience, worked outside an office with minimal supervision and were awarded “incentive pay” — an uncapped amount based on sales in assigned territories — on top of their base salary. The Court further held that the language of the FLSA outside sales exemption was an attempt to accommodate industry-by-industry variations in methods of selling goods. This regulatory intent, combined with established industry practice and other indicia that the employees were engaged in sales, was sufficient to bring them within the outside sales exemption.

Justice Alito noted in the majority opinion that the FLSA exempted outside salesmen from overtime pay because they “typically earned salaries well above the minimum wage” and received other benefits:

Petitioners – 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. And it would be challenging, to say the least, for pharmaceutical companies to compensate [reps] for overtime going forward without significantly changing the nature of that position.

Court Limits on New Pseudo-Regulation Via Enforcement

Separate from the merits of whether the FLSA outside sales exemption applies in this particular case, the Court unanimously rejected the DOL’s attempt to implement, in effect, new regulation through its amicus brief. Justice Alito wrote that the DOL had not once in 70 years of the drug-rep pay system filed an enforcement action of this kind with respect to pharmaceutical reps or suggested that the industry practice of treating reps as exempt was unlawful. Instead of going through a formal rulemaking process, the agency attempted to implement what Justice Alito called an “unfair surprise” on the industry. The Court also expressly declined to defer to the DOL’s interpretation, noting that deference is not appropriate where the agency’s interpretation is “plainly erroneous or inconsistent with the regulation,” where there is reason to believe that it “does not reflect the agency’s fair and considered judgment on the matter” and where it would constitute “unfair surprise” in departing from long-standing agency and industry practice. Significantly, Justice Breyer, writing for the dissenting members of the Court, agreed with this aspect of the majority decision, saying that the DOL’s interpretation should not be given “any especially favorable weight.”

The Christopher lawsuit was part of the Administration’s increased enforcement initiative and attempt to bring more workers under federal wage-and-hour laws as non-exempt employees. In connection with these efforts, the DOL has aggressively expanded its use of amicus briefs in recent years, and courts have had mixed reactions to those attempts. The ruling in Christopher sends a message that courts need not defer to positions taken in litigation by federal agencies that present a new regulatory interpretation. Further, in light of the decision, courts should give more weight to established industry and agency practice and recognize that FLSA-exempt “selling” includes more activities than simple consummation of a sales transaction.

Employer Takeaways

Despite the Christopher ruling, the DOL can be expected to continue taking an aggressive position regarding the exempt status of employees. While those who employ pharmaceutical reps can rest a bit easier, other employers — especially those in targeted industries such as healthcare and financial services, or with employees in targeted professions such as computer professionals and outside sales reps — should take a hard look at their exempt positions and determine whether the exempt determination will withstand DOL scrutiny.

For assistance with these or other wage and hour matters, please contact the authors or other members of the McGuireWoods Labor & Employment team.