In a big victory for drug companies, the U.S. Supreme Court has ruled that pharmaceutical sales representatives are not entitled to overtime wages under the Fair Labor Standards Act.
The justices split, 5-4, in favor of deciding that the roughly 90,000 pharmaceutical sales reps working in the industry are “outside salesmen” and exempt from the federal wage and hour law.
The ruling is significant for drug companies, which have been facing a number of class action lawsuits filed by pharmaceutical sales reps who want back wages for working more than 40 hours in a week.
It remains to be seen how far reaching the ruling in Christopher v. SmithKline Beecham Corp. will be, given that it specifically dealt with the classification of pharmaceutical sales reps. Many sales jobs are already exempt from the FLSA under the “outside salesman” regulation and not entitled to time and a half for working more than 40 hours.
The court noted that pharmaceutical sales reps are different than typical salespeople in that they operate in a “unique regulatory environment” where they do not actually sell medication but only try to persuade physicians to write prescriptions for their products in appropriate cases.
Still, Justice Samuel Alito wrote in a footnote, “When an entire industry is constrained by law or regulation from selling its products in the ordinary manner, an employee who functions in all relevant respects as an outside salesman should not be excluded from that category based on technicalities.”
The plaintiffs in the case, Michael Christopher and Frank Buchanan, argued that they and other pharmaceutical sales reps they represent in the class-action lawsuit should not be considered “outside salesmen” because they only facilitated sales that were made by others.
They pointed out that “prescription drugs are not actually sold until distributors and retail pharmacies order the drugs from other employees,” which the plaintiffs said were the “true salesmen in the industry.”
The four dissenting justices agreed with this interpretation, with Justice Stephen Breyer a pharmaceutical sales rep’s job “is more naturally characterized as involving ‘promotional activities designed to stimulate sales . . . made by someone else.'”
But the majority dismissed the argument, writing that if “taken to the extreme,” it would require FLSA coverage for “a car salesman who receives a commitment to buy (a car) but then asks his or her assistant to enter the order into the computer.”
Alito wrote that a pharmaceutical sales reps’ “end goal was not merely to make physicians aware of the medically appropriate uses of a particular drug. Rather, it was to convince physicians actually to prescribe the drug in appropriate cases.”
The ruling hinged on the Supreme Court’s decision not to follow the U.S. Department of Labor’s recent interpretation that pharmaceutical sales reps are not “outside salesmen” under the FLSA.
The court noted that it was only adopted in court filings related to the case and “plainly lacks the hallmarks of thorough consideration.”
“To defer to the agency’s interpretation in this circumstance would seriously undermine the principle that agencies should provide regulated parties ‘fair warning . . . ,’” Justice Alito wrote.
Rather, the Court relied on the statute itself as well as long-standing DOL regulations in reaching its conclusion. The Court noted that the FLSA emphasizes a “functional, rather than a formal, inquiry” in deciding whether an employee should be exempt.
The Court wrote that pharmaceutical sales reps are hired for their sales experience, are trained to close each sales call by obtaining a non-binding commitment, are allowed to work away from the office with minimal supervision, and are rewarded with incentive compensation.
“It follows that (plaintiffs) made sales for the purpose of the FLSA and therefore are exempt outside salesmen within the meaning of the DOL’s regulations,” Alito concluded.
For more information, please contact Patrick Peters at ppeters@beneschlaw.com or (216) 363-4434 or Joseph Gross at jgross@beneschlaw.com or (216) 363-4163.
Labor & Employment Developments 