Fenwick Employment Brief - July 11, 2012

U.S. SUPREME COURT RULES THAT PHARMACEUTICAL SALES REPRESENTATIVES QUALIFY FOR OUTSIDE SALES EXEMPTION - POSSIBLE IMPLICATIONS FOR CALIFORNIA EMPLOYERS

In a favorable decision for employers, the U.S. Supreme Court in Christopher v. SmithKline Beecham Corporation decided that the federal FLSA exemption for an "outside salesman" covered pharmaceutical sales representatives who obtained nonbinding commitments from physicians to prescribe their employer's prescription drugs. The FLSA exempts from overtime and minimum wage those employees who engage in outside sales. The law does not exempt employees who engage in "promotion work." A split developed among the federal circuit courts over whether the pharmaceutical sales representatives fit within the outside sales exemption or performed nonexempt promotion work. Under federal regulation, prescription drugs may only be dispensed with a physician's prescription. In light of this requirement, pharmaceutical manufacturers focus their "sales" efforts on these physicians. The pharmaceutical sales representatives provide information to physicians about the products with the goal of obtaining nonbinding commitments from doctors to prescribe the employer's products.

The federal Ninth Circuit (covering western states including California) ruled that this amounted to "sales" within the meaning of the outside sales exemption. Conversely, the Second Circuit (covering eastern states including New York) concluded that the exemption did not apply as no "sale" occurred. The federal Department of Labor urged that a "sale" requires the transfer of title to the product and there was no sale as the physicians did not directly purchase the prescription drugs from the sales representatives. Rejecting this argument, the Supreme Court held that, within the regulatory environment of the pharmaceutical industry, obtaining a nonbinding commitment from physicians to prescribe the employer's product was the most the sales representatives were legally able to accomplish. Accordingly, this amounted to a "sale" within the meaning of the FLSA. In support of this conclusion, the Court noted that sales representatives were awarded incentive compensation, they were highly compensated (at an average of more than $70,000 per year) and were "hardly the kind of employees that the FLSA was intended to protect."

California employers with out-of-state, outside sales representatives should benefit from this ruling. As to California employees, California defines an outside salesperson as an employee "selling tangible or intangible items or obtaining orders or contracts for products, services or use of facilities." State law does not further define the word "selling." California state courts and enforcement agencies may find the Supreme Court's interpretation of the word "sales"...