Sales Reps v. Pharma: The Overtime Issue

The Supreme Court’s Decision on whether sales reps should qualify for the ‘outside sales exemption’ could have far reaching implications for pharma, write Lisa A. Schreter and Kimberly J. Gost.

On April 16, 2012, the U.S. Supreme Court heard oral argument in Christopher v. SmithKline Beecham Corporation, one of the only Supreme Court cases to address the overtime exemptions under the Fair Labor Standards Act (FLSA), and the first to address the criteria for the outside sales exemption. At issue is whether pharmaceutical sales representatives qualify for the outside sales exemption, and are therefore not entitled to overtime, because pharmaceuticals are generally purchased by end-users at pharmacies, which purchase from wholesale distributors.  The Court’s decision may have far-reaching implications for the pharmaceutical industry. 

The case involves former SmithKline (now GSKSmithkline [GSK]) reps who are seeking to reverse the Ninth Circuit Court of Appeals’ decision that: (1) GSK’s reps were properly classified as exempt “outside sales” employees, and (2) the court was not required to defer to the U.S. Department of Labor’s (DOL) amicus brief, filed in support of the Reps, which narrowly interpreted the exemption. First, the reps argue they are not engaged in sales because they do not actually sell GSK products to anyone.  Rather, they claim, sales reps “promote” GSK products to healthcare providers and “provide medical professionals who prescribe pharmaceuticals with the ‘details’ of pharmaceutical products, seeking to educate the prescribers with the ultimate goal of influencing their prescribing decisions.”  The reps rely heavily on the fact that they are prohibited by federal law from actually selling pharmaceuticals.  Second, the reps argue that the Ninth Circuit erred by not deferring to the DOL’s interpretation of its regulations, and actually “usurped the role that Congress assigned to the Department of Labor.”   

GSK, on the other hand, argues for affirmance of the Ninth Circuit’s decision. While the reps characterize their duties as merely promoting GSK’s products to physicians and not actually consummating sales, GSK emphasizes that physicians, who are the only people authorized under federal law to write prescriptions, are the real “customers” and the focus of GSK’s sales efforts.  When hiring reps the company prefers candidates with prior sales experience.  In fact, the rep job announcement states that reps’ “key responsibility” is to “[s]ell products to [a] specific customer market according to the business plan.”  reps are expected to use “customer-focused selling techniques,” to develop and deliver informative “sales presentations based on customer needs,” and to “[p]ositively impact sales in [their] territory.”  GSK trains reps in specialized sales skills, and “closing the sale” by asking for a commitment from customer-physicians to prescribe GSK products for patients when medically appropriate.  On the job, reps visit physician-customers at the physicians’ locations.  They target physicians they believe can appropriately prescribe more GSK products and thus increase GSK’s sales in their territories, and then tailor their sales approach for those physicians.  Sales reps are evaluated on sales techniques: planning for each sales call; executing effective sales presentations; and obtaining commitments from physicians to prescribe GSK products for appropriate patients.  In addition to salary, a significant portion of the reps’ total pay is commission contingent upon convincing physicians they call on to write more prescriptions for GSK drugs for appropriate patients, directly increasing sales within the territory.

GSK also argues that the DOL’s interpretation of the outside sales exemption is much more restrictive than the broad and flexible language of the FLSA and the DOL’s implementing regulations.  GSK further argues that the DOL’s current position is a radical change that would abrogate regulatory rulemaking procedures and reverse over 70 years of acceptance of reps as exempt from overtime.  GSK asserts that the DOL’s interpretation of the exemption ignores the language of the statute itself, Congressional intent, and the DOL’s own prior interpretations of its regulations which never previously construed sales as requiring an actual transfer of title.  GSK points out that when the current regulations were adopted in 2004, the DOL emphasized that it “did not intend any substantive changes” and it in fact did not change its interpretation of the term “sales.” The DOL specifically reiterated that all that is required for the exemption to apply is that the employee “in some sense make the sales.” Over the years the DOL has also provided guidance approvingly quoting judicial decisions for the proposition that “the term ‘sale’ does not always have a fixed or invariable meaning.” Thus, until recently, GSK argues, the DOL has consistently construed the term “sale” in a flexible and pragmatic, rather than a technical or restrictive, manner.

GSK argues that the DOL’s new, sharply constrained interpretation of the term “sales” in its amicus brief amounts to a “reinterpretation” of its regulations resulting in an “unfair surprise” to employers.  Granting deference to the DOL’s current interpretation would also allow the DOL to make an “end run” around the agency rulemaking process, circumventing the procedural safeguards the process provides.  

In sum, GSK asks the Supreme Court not to defer to the DOL’s about-face regulatory interpretations, and instead find that reps do in fact make “sales,” which in the pharmaceutical industry is a nonbinding commitment by physicians to prescribe particular pharmaceuticals when medically appropriate.  This approach is supported by the text of the FLSA, which defines the word “sale” to include “consignment” and “other dispositions” that do not necessarily require a transfer of title, and by the DOL’s own usage and regulations, which as recently as 2004 reaffirmed the concept that a salesperson is someone who “in some sense” sells.

Regardless of the outcome of the SmithKline Beecham case, the Supreme Court’s decision will likely provide guidelines to assist pharmaceutical companies in assessing whether the reps they employ satisfy the criteria for the outside sales exemption.  Pharmaceutical executives should also keepin mind that even if reps are found not to satisfy the outside sales exemption, they may nevertheless qualify as exempt employees.  In 2010, in Smith v. Johnson & Johnson, the Third Circuit Court of Appeals found that Johnson & Johnson’s reps satisfied the FLSA’s administrative exemption because their duties were “directly related to the management or general business operations of the employer,” as the FLSA requires, and the position required reps to form high-level strategic plans to maximize sales in their territories. The court found the position also required the “exercise of discretion and independent judgment” because nearly all the duties were carried out without direct oversight.  The court emphasized, however, that its decision was based on the specific facts in this particular case and that a different outcome might result based on different facts involving reps for other pharmaceutical companies.

Thus, while the pharmaceutical industry remains hopeful that the Supreme Court will conclusively determine that reps are exempt outside sales employees, regardless of the outcome, the decision may still leave open issues requiring careful analysis of the exemption status of sales reps.

About the Authors

Lisa A. Schreter is co-chair of Littler Mendelson’s Wage and Hour Practice Group and Kimberly J. Gost is a shareholder in the firm’s Philadelphia office and specializes in complex wage and hour litigation. Littler is the nation’s largest labor and employment law firmrepresenting management. They can be reached at lschreter@littler.com andkgost@littler.com. Littler shareholdersRichard W. Black and Bradley E. Strawn assisted in the preparation of this article.