Supreme Court Holds That Outside Sales Exemption Applies To Pharmaceutical Sales Reps

Michael Prendergast is a Partner in our Jacksonville office and Erika Royal a Partner in our Ft Lauderdale office.

On June 18, 2012, the United States Supreme Court held in Christopher et al. v. GlaxoSmithKline Beecham Corp., d/b/a Glaxosmithkline, No. 11-204, that the Fair Labor Standards Act's "outside sales" exemption applies to "pharmaceutical sales representatives" (PSRs) whose primary duty is "to obtain nonbinding commitments from physicians to prescribe their employer's prescription drugs in appropriate cases." The decision resolved a split between the Ninth Circuit, which found the PSRs to be exempt outside salespersons, and a contrary 2009 decision in the Second Circuit.

There are two significant take-aways from the Court's decision. First, the Court held that whether an employee is an outside salesperson is considered from a functional approach: is the employee's function to achieve the sale of their employer's products or services in the manner allowed in that industry, regardless of whether the employee actually consummates a transfer of property? Second, regulatory agencies that deviate from long-established interpretations of statutes and regulations with little or no notice will not likely be given any deference by a court.

Background

The Fair Labor Standards Act (FLSA) generally requires employers to pay their employees overtime wages of not less than one-and-one-half times their regular hourly rate for all hours worked over 40 in each workweek. 29 U.S.C. § 207(a)(1). This requirement does not apply, however, to workers employed "in the capacity of outside salesman." 29 U.S.C. § 213(a)(1). Congress delegated to the Department of Labor (DOL) responsibility for issuing regulations defining the term "outside salesman." The relevant regulations are found at 29 CFR § 541.500(a)(1)-(2), 29 CFR § 541.501(b), and 29 CFR § 541.503(a). Specifically, the term "sales" is defined in section 3(k) of the FLSA to include "any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition." 29 U.S.C. § 3(k) (emphasis added).

Federal law prohibits pharmaceutical companies from selling prescription products directly to its ultimate users - patients. Rather, pharmaceutical companies sell their prescription drug products to distributors or pharmacies. Physicians write prescriptions that allow patients to purchase the drugs.

GlaxoSmithKline and other pharmaceutical companies employ thousands of PSRs to encourage...