U.S. Supreme Court Rules that Pharmaceutical Representatives are Not Entitled to Receive Overtime Pay

U.S. Supreme Court Rules that Pharmaceutical Representatives are Not Entitled to Receive Overtime Pay

At first glance, the recent decision of the United States Supreme Court seems to be fairly obvious and straight-forward: Pharmaceutical representatives have been restored to their previous classification as “outside sales employees” under the Fair Labor Standards Act (FLSA), meaning they are exempt from the statute’s requirements regarding minimum wages and overtime pay.

However, this case is worth reviewing more closely, because it was a 5 to 4 decision, split among partisan lines, with the Republicans favoring the exempt status for pharmaceutical representatives, and the Democrats favoring a non-exempt status that would have allowed the representatives to receive overtime compensation. The analysis presented in this decision could affect employee classifications in other industries. 

The case is Christopher et al v Smith Kline Beecham Corp. d/b/a GlaxoSmithKline, which was decided on June 18, 2012. The Plaintiffs worked for GlaxcoSmithKline as pharmaceutical representatives. They worked both during and after normal business hours, often in excess of 40 hours per week, and they received bonuses based on the company’s pharmaceutical sales within their regions. The Plaintiffs sued to collect overtime pay under recently issued regulations by the U.S. Department of Labor. The pharmaceutical industry, facing the prospect of having to pay billions of dollars in overtime pay, argued that the new regulations issued by the FLSA.

Congress enacted the FLSA in 1938, to protect all covered workers from substandard wages and oppressive working hours. To that end, the FLSA imposes a minimum wage, and sets a maximum number of hours that an employee may be required to work on a weekly basis without additional compensation. For most workers, the minimum wage is currently $7.25 per hour, and the maximum hours are 40 hours per week. 

Generally, executive, administrative and professional employees, outside sales employees and certain skilled computer professionals are exempt from both the minimum wage and overtime pay requirements. Until 2009, the Department of Labor had classified pharmaceutical representatives as “outside sales employees.” 

In his dissenting opinion, Justice Stephen J. Breyer agreed with the 2009 change by the Department of Labor stating that pharmaceutical representatives do not “sell” anything to the doctor. The Justice then quoted Black’s Law Dictionary, which defines “sale” as “the transfer of property or title for a price.” The Justice further noted that while doctors do write prescriptions for medications, the final “sale” is contingent upon the prescription being filled by the patient. 

Writing for the majority, however, Justice Samuel J. Alito noted that one of the Plaintiffs received just over $72,000 in annual gross pay, and the other Plaintiff received just over $76,000. He stated these employees are “hardly the kind of employee that the FLSA was intended to protect,” and that the Department of Labor has made it clear in previous reports that exempt status should not “depend on technicalities,” such as “whether it is the sales employee or the customer who types the order into a computer system and hits the return button.” Because pharmaceuticals may only be dispensed to patients upon a physician’s prescription, the Justice reasoned, “pharmaceutical companies have long focused their direct marketing efforts, not on the retail pharmacies that dispense the prescription drugs, but rather on the medical practitioners who possess the authority to prescribe the drugs in the first place.” 

The Court rejected the argument that pharmaceutical representatives were not “outside salesmen” because a “transfer of title to property” did not take place, stating that the Department of Labor’s own regulations define “sales” as to “include the transfer of title to tangible property,” and this inclusion in no way limited the definition of “sales” to that inclusion. The Court also found it was not bound by the Department of Labor’s 2009 regulations regarding this novel definition of “sales,” because the regulations had been issued upon the filing of briefs as opposed to a formal rule-making process.

The Court then included a finding that could serve as a test in future cases. It stated the Plaintiffs “bear all of the external indicia of salesmen.” For example, “they were hired for their sales experience. They were trained to close each sales call by obtaining the maximum commitment possible from the physician. They worked away from the office, with minimum supervision, and they were rewarded for their efforts with incentive compensation.” It is now clear pharmaceutical representatives are deemed to be “outside sales employees,” and therefore exempt from receiving overtime compensation. The question remains, however, whether this 5 to 4 decision would apply to employees who fall within more of a gray area, such as those who perform both outside sales and in-house customer service functions.

Linda Davis Friedland is an attorney in our Livonia office where she concentrate her practice on Commercial Litigation, Employment and Labor Law, Corporate and Business Law, Estate Planning, Utilities Law and Municipal Law. She can be reached at (734) 261-2400 or lfriedland@cmda-law.com.