6/18/2012 Pharmaceutical Sales Reps are Exempt From Overtime Under FLSA
In a recent decision by the United States Supreme Court, the Court determined that Pharmaceutical Sales Representatives (“PSRs”) qualify as outside salesmen and are exempt from the overtime requirements under the Fair Labor Standards Act (“FLSA”). Christopher v. Smithkline Beecham Corp., No. 11-204 (U.S. June 18, 2012). Following extensive analysis of the meaning of the term “sale” under the statutes, regulations, and Department of Labor (“DOL”) interpretations, the Court determined that the activities performed by the PSRs most closely resemble exempt sales activity – despite the fact that PSRs themselves do not make direct sales to doctors or pharmacies. Surprisingly, the Court refused to give any special weight to the position taken by the DOL in recent years that PSRs are not exempt under the FLSA. The Court stated that to give deference to the DOL’s recent position on the issue would create undue surprise to employers who had no fair warning of the DOL’s position on the issue until after litigation had started, and stated that the DOL’s position was inconsistent with the statute and regulations.
In the pharmaceutical industry, manufacturers hire PSRs (sometimes called “detailers”) to market prescription drugs to physicians who write prescriptions. Due to industry regulation, only physicians may dispense prescription drugs, and as a result, PSRs focus their marketing efforts on physicians instead of marketing directly to pharmacies. PSRs market drugs to physicians in an attempt to obtain a “non-binding commitment” from physicians to prescribe a particular drug when medically appropriate.
Two PSRs brought suit in the United States District Court for the District of Arizona against their employer claiming the employer had improperly treated them as exempt, and had failed to pay them overtime. The employer argued that the employees were employed in the capacity as outside salesmen, and were therefore exempt from overtime. The District Court found the employees were exempt from overtime, and the Court of Appeals for the Ninth Circuit affirmed. The Ninth Circuit determined that recent DOL interpretations stating that PSRs are not considered exempt should not be given deference. The Ninth Circuit’s decision in this case conflicted with the Second Circuit’s decision in In re Novartis Wage and Hour Litigation, 611 F.3d 141, 153, 155 (2010) (holding that the DOL’s PSR interpretation is entitled to controlling deference).
The Outside Salesman Exemption
Pursuant to the FLSA, covered employers must generally pay employees overtime pay at the rate of one and one-half times the employee's regular rate of pay for all hours worked in excess of 40 hours in one workweek. See 29 U.S.C. § 207(a). There are certain exemptions to the overtime requirements under the FLSA. One such exemption applies to outside salespeople. See 29 U.S.C. § 213(a)(1). In order to qualify for the outside sales exemption under the FLSA, the employee’s primary duty must be to make sales (as defined in the FLSA and its regulations) and the employee must be customarily and regularly engaged away from the employer’s place of business. See 29 C.F.R. § 541.500(a)(1)-(2).
A “sale” is defined by statute as including any “sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.” See 29 U.S.C. § 203(k). The regulations go on to define “sale” to include the “transfer of title to tangible property, and in certain cases, of tangible and valuable evidences of intangible property.” See 29 C.F.R. § 541.501(b). The Christopher Court went on to note that the DOL has stressed that the requirement the outside salesmen make their own sales is met whenever the employee “in some sense makes a sale.”
The Court Refuses to Give Deference to DOL Interpretation
Ultimately, the Court agreed with the Ninth Circuit and refused to give deference to the DOL interpretation claiming that PSRs were not exempt from overtime. While DOL interpretations are typically given deference (see Auer v. Robbins, 519 U.S. 452 (1997)), the Court determined in this case it was not warranted. The Court focused on two reasons for failing to give deference. First, the DOL had not provided the interpretation until 2009 - after the litigation at issue had commenced. The Court found that this fact provided no notice to the employer (or the industry) that the DOL did not consider PSRs exempt from overtime. Secondly, the Court relied on the fact that the DOL had not initiated any enforcement actions with respect to industry practices related to PSRs, or otherwise informed the industry that its overtime practices violated the law, despite the industry treating PSRs as exempt for 70 years.
“Sale” Broadly Defined by the Court
After refusing to follow the DOL interpretation, the Court turned to an analysis of the statutory language of the FLSA to determine whether PSRs should be considered “salesmen” under the FLSA. The Court found that because PSRs are hired “in the capacity of” salesmen, otherwise acted like salesmen in other industries, obtained the “maximum commitment possible” from the physician, and were paid well, PSRs are exempt under the FLSA. The Court also interpreted the definition of “sale” under the statute and regulations very broadly to encompass the “non-binding commitment” received by the PSRs, even though the PSRs do not technically sell the prescription drugs to the physicians.
PSRs in Minnesota
Similar to the FLSA, the Minnesota Fair Labor Standards Act (“MFLSA”) applies to covered Minnesota employers. The provisions of the MFLSA require that covered employers pay overtime pay at the rate of one and one-half times the employee's regular rate of pay for all hours worked in excess of 48 hours in one workweek, unless the employee qualifies for an exemption under the MFLSA.
The MFLSA has an outside sales exemption, similar to the FLSA. However, the test under the MFLSA is somewhat different than the test under the FLSA. In order to qualify for the outside sales exemption under the MFLSA, the employee must (1) make sales; (2) be hired for the express purpose of making sales away from the employer’s place of business; (3) conduct no more than 20% of sales on the employer’s premises; and (4) the employee’s hours of non-sales work must not exceed 20% of the employee’s total work hours. See Minn. R. § 5200.0220. (In addition, PSRs conceivably may qualify for other exemptions under the MFLSA that are beyond the scope of this article.)
While Christopher applies to employers covered by the FLSA, it is unclear how the decision in Christopher will impact Minnesota employers relying on the MFLSA outside sales exemption. The test for exemption under the MFLSA is different than the one analyzed in Christopher. Minnesota courts, however, often interpret the MFLSA similarly to the FLSA. Only time will tell whether the Minnesota courts follow Christopher when applying the MFLSA to PSRs.
What Employers Should Know
The Christopher decision has affirmed the practice by the pharmaceutical industry of treating PSRs as exempt under the FLSA. However, pharmaceutical companies employing PSRs in Minnesota may also be subject to the MFLSA which has a different test to qualify employees for the outside sales exemption and may expose an employer to overtime liability for hours worked in excess of 48 hours per workweek. If you have questions about whether certain PSR employees are exempt under the FLSA or MFLSA, please contact any of the Trepanier & MacGillis P.A. employment law attorneys.
About the Author:
Trepanier & MacGillis P.A. attorney Jessica N. Hofrichter practices in the areas of labor and employment law, commercial litigation, and corporate law. Jessica may be reached at 612-455-0505 or firstname.lastname@example.org. Jessica has a special interest in representing employers and employees in wage and hour matters, including independent contractor misclassification, FLSA overtime litigation, and disputes over unpaid wages, commissions, and bonuses.