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June 19, 2012
Supreme Court Says No Overtime for Pharma Sales Reps

The U.S. Supreme Court has ruled that employers need not pay overtime, under the federal Fair Labor Standards Act (FLSA), to the legions of pharmaceutical sales representatives (PSRs) who show up in doctors’ offices with laptops and drug samples. The high court has affirmed the Ninth Circuit’s ruling in Christopher v. SmithKline Beecham Corp., which conflicted with a Second Circuit decision involving the drug maker Novartis.

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What is a PSR?

For background, the PSR job is something of a hybrid given the nature of the pharmaceutical industry. PSRs can’t sell prescription drugs to the doctors because legally, the meds may be sold only to a patient with a doctor’s prescription. The PSRs promote their employers’ products to doctors with the goal of getting them to make a nonbinding promise to prescribe the drugs as appropriate.

It’s not unusual for PSRs to earn more than $100,000 per year in salary, incentive payments, and benefits, a partner at a large national law firm representing employers told the House Education and Workforce Subcommittee in July 2011. So they’re hardly the stereotypical hourly employees who are entitled to overtime.

In the two conflicting FLSA overtime cases, the PSRs argued that because they don’t actually sell the meds, they’re not salespeople for purposes of the Act’s overtime exemption and therefore they should be paid overtime. The federal Department of Labor (DOL) supported their position. In the case involving Novartis, the Second Circuit ruled in favor of the PSRs and followed the DOL’s reasoning to find them entitled to overtime pay. But in the Ninth Circuit, the court ruled just the opposite. It reasoned that PSRs are hired for sales skills, taught sales techniques, and compensated in part based on increased sales of their meds. The U.S. Supreme Court has affirmed the Ninth Circuit's decision.

Backstory to the lawsuits

Why were PSRs trying to qualify for overtime when the industry practice for many years was to treat them as FLSA-exempt salespersons? The spate of PSR overtime lawsuits seems to date back to about 2006. That year, the Associated Press (AP) reported that nine major drug companies faced class-action claims seeking tens of millions of dollars in unpaid overtime for thousands of employees. The lawsuits, according to the AP, were “the latest in a series of mass … claims seeking overtime pay from U.S. businesses in recent years.” It seems that several industry factors were coalescing. Cell phones and email lengthened the PSRs’ workdays. More doctors were brushing off PSRs, according to a 2007 Chicago Tribune report, so they had to work harder to get face time with physicians. And some employers began to require the PSRs to follow a fixed script, removing “freedom for what the [outside sales] exemption was designed,” the AP said.

Test for Exempt Outside Sales Employee

Outside sales personnel are exempt from both minimum wage and overtime requirements. There is no minimum salary requirement for the outside sales personnel exemption. The following standard duties test is the federal standard. To qualify for the outside sales personnel exemption, an employee must:

  • Have a primary duty that consists of making sales or obtaining orders or contracts for services or the use of facilities for which a consideration will be paid by the client or customer
  • Customarily and regularly work away from the employer's place or places of business

Sales. The FLSA defines “sale” or “sell” as any exchange, contract of sale, assignment to sell, shipment for sale, or other disposition.

Services. The inclusion of obtaining orders or contracts for services in the primary duties test extends the outside sales exemption to employees who sell or take orders for a service, which may be performed for the customer by someone other than the person taking the order.

Customarily and regularly. The term “customarily and regularly” is defined as:

  • A frequency that is greater than occasional but may be less than constant
  • Including work normally and recurrently performed every workweek
  • Not including isolated or onetime tasks

Away from the employer’s place of business. An outside sales employee is an employee who makes sales or solicitations, or related activities, at the customer’s place of business or, if selling door-to-door, at the customer’s home. Any fixed site, whether home or office, used by a salesperson as a headquarters or for telephonic solicitation of sales is considered one of the employer’s places of business, even though the employer is not the owner or tenant of the property. Outside sales does not include sales made by mail, telephone, or the Internet unless such contact is used merely as an adjunct to in-person sales calls. Activities employees perform that are incidental to their outside sales or solicitations also qualify as exempt outside sales work, but only if the incidental activity is in support of their own sales and not just generally directed toward stimulating the sales of the company.

Promotional work. The following promotional work is considered to be exempt sales work:

  • Promotional work that is actually performed incidental to and in conjunction with an employee’s own outside sales or solicitations
  • Promotional activities directed toward consummation of the employee’s own sales

Promotional work that is not exempt includes:

  • Promotional work that is incidental to sales made, or to be made, by someone else
  • Promotional activities designed to stimulate sales that will be made by someone else

U.S. Supreme Court’s Decision

The U.S. Supreme Court ruled that PSRs are exempt under the FLSA, stating that “until 2009, the pharmaceutical industry had little reason to suspect that its longstanding practice of treating detailers as exempt outside salesmen transgressed the FLSA. The statute and regulations certainly do not provide clear notice of this.” But in 2009, the DOL introduced its view that PSRs are nonexempt in a Second Circuit amicus brief. Since 2009, the DOL has held this opinion, and argued that to qualify as an exempt outside salesman, the individual must actually transfer title to the property.

The Supreme Court states in its opinion, “ … despite the industry’s decades long practice of classifying pharmaceutical detailers as exempt employees, the DOL never initiated any enforcement actions with respect to detailers or otherwise suggested that it thought the industry was acting unlawfully.” The Court argued, “other than acquiescence, no explanation for the DOL’s inaction is plausible.”

As for the sales reps specifically, the Court noted that the FLSA exempts employees working in the capacity of an outside salesperson. “The statute’s emphasis on the “capacity” of the employee counsels in favor of a functional, rather than a formal, inquiry, one that views an employee’s responsibilities in the context of the particular industry in which the employee works.” Furthermore, the broad definition of "sale" as described above, does not require the narrow application supported by the DOL.

Christopher ET AL. v. SmithKline Beecham Corp., DBA GlaxoSmithKline: http://www.supremecourt.gov/opinions/11pdf/11-204.pdf

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