The Pharmaceutical Industry Dodges a Billion-Dollar Bullet

25 June 2012 Labor & Employment Law Perspectives Blog

On June 18, 2012, the U.S. Supreme Court issued a landmark decision in Christopher v. SmithKline Beecham, Corp. , finding that the pharmaceutical industry does not have to pay overtime to its sales representatives who visit doctors’ offices to promote their products — a dispute that had threatened the industry with billions of dollars in potential liability. This decision confirmed the industry-wide practice of paying sales representatives a base salary plus commission, and no overtime.

In reaching its decision, the Court flatly denied deference to the Department of Labor’s (DOL) Opinion that the sales representatives were exempt because the representatives did not “transfer title” when promoting the industry’s products. After ruling that the DOL was not entitled to deference on this issue, the Court focused on the issue of whether the pharmaceutical sales representatives were “making sales” for purposes of the outside sales exemption to the FLSA. The Court determined that the sales representatives were making sales within the meaning of the outside-sales exemption because the representatives obtained commitments from the doctors to prescribe particular drugs in various circumstances. In determining that the drug representatives were exempt, even where title to the drugs never changed hands, the Court considered the highly regulated nature of the pharmaceutical and health care industry, explaining that “an employee who functions in all relevant respects as an outside salesman should not be excluded from that category based on technicalities.”

The Supreme Court decision is certainly a victory for employers, with the high court taking a broad view of the term “sale” in a function-based analysis. The decision could signal a shift in FLSA analysis away from the more rigid, formalistic approach championed by the DOL. Certainly, the Supreme Court also was mindful that each of the Plaintiffs made more than $70,000 per year — far more than the typical non-exempt worker. The Supreme Court also has clearly sent a message to the DOL that sudden changes in regulatory interpretations will not be looked upon with favor.

While this ruling is certainly a blow to the DOL, employers still should be mindful of the requirements for the outside sales exemption. In order to qualify: 1) the employee’s primary duty must be making sales; and 2) the employee must be customarily and regularly engaged away from the employer’s place of business (including work away from any home office). Each employer still should seriously consider whether its employees are making sales away from the employer’s place of business before deciding whether the outside sales exemption applies.

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