Supreme Court To Rule On Critical FLSA Overtime Issue

The United States Supreme Court will soon consider whether pharmaceutical sales representatives ("PSRs") are entitled to overtime pay under the Fair Labor Standards Act ("FLSA").  The case comes to the Court from the Ninth Circuit where that court found that PSRs are exempt from overtime pay under the FLSA's "outside sales" exemption.  In contrast, the Second Circuit had previously ruled that PSRs are not exempt from overtime.  Thus, there is a circuit split and the Supreme Court's decision could have ramifications for employers in general, especially those that maintain an outside sales force.

Background

Over the last several years class action lawsuits have popped up all over the country challenging PSRs status as exempt employees.  Most pharmaceutical companies treat their PSRs as outside sales people because PSRs spend most of their time traveling, visiting with physicians, and engaging in sales-like activities.  The Department of Labor ("DOL"), however, has taken a different view.  The DOL filed amicus briefs in most of the class action cases, contending that PSRs are not exempt under any FLSA category.  Accordingly, the Supreme Court will consider two issues:

1. Whether deference is owed to the DOL's interpretation of the FLSA's outside sales exemption and related regulations; and
2. Whether the FLSA's outside sales exemption applies to PSRs.

What Deference Is Owed To The DOL's Position?

As to the first issue, the Ninth Ciruit - in rejecting the plaintiffs' and DOL's position - spent a considerable amount of time discussing the level of deference it should give to the DOL's brief.  To answer that question, the court examined two types of deference: (1) Auer deference and (2) Gonzales deference - both of which come from earlier Supreme Court cases.  Under Auer deference, if an agency's regulations are ambigious, and the agency attempts to clafiry the ambiguity, then courts will generally defer to the agency's position unless it is plainly erroneous or inconsistent with the statute.  In contrast, under Gonzales courts will not award deference to an agency's interpretation of a regulation that merely "parrots" or restates statutory text.

The Ninth Circuit decided that the DOL's brief was only entitled to Gonzales deference, which is to say no deference at all.  Because the regulation the DOL sought to clarify "parrotted" the FLSA's statutory text, the court found that the DOL "fail[ed] to add specificity to the statutory scheme."  Instead, the court characterized the DOL's regulatory interpretation as an impermissible "reinterpretation" of the FLSA itself.  Such reinterpretation is generally the province of Congress, not the DOL.  As a result, the Ninth Circuit did not give deference to the DOL's brief and concluded that PSRs were exempt from the FLSA's overtime provisions.  Therefore, and as a practical matter, how the Supreme Court rules on this first issue will likely determine how it ultimately rules on the issue of whether PSRs are "outside sales" people.

What Constitutes A "Sale"?

Under the FLSA, an "outside salesman" is (1) an employee whose primary duty is (a) making sales within the meaning of Section 3(k) of the Act; or (b) obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and (2) who is primarily engaged away from the employer's place of business in performing their primary duty. 

The DOL's position is that PSRs are not outside salesmen because they do not "make sales" within the meaning of the FLSA.  Rather, PSRs promote a drug that a patient may then purchase from a pharmacy.  In short, PSRs primary duties are promoting, not selling.

The Ninth Circuit's postion is that the DOL's stance ignores the economic and structural reality of the pharmaceutical sales industry.  In reality, PSRs are hired for their sales experience, trained in sales methods, recieve compensation based on their sales, and are prohibited by federal law from making sales directly to patients.  Furthermore, the purchasers of the drugs are, in fact, the physicians because the patient cannot receive the product without a doctor's prescription.  Therefore, for pursposes of the pharmaceutical industry, a "sale" occurs when a PSR obtains a non-binding commitment from a physician to prescribe their drug.  In that sense PSRs do "make sales" and are exempt from overtime.  

Potential Impact Of Supreme Court's Decision

The Court's decision in this matter could prove significant because:

• Pharmaceutical companies employ nearly 90,000 PSRs, and a wholesale shift in compensation could have a dramatic ripple effect on the healthcare industry;
• Depending on how the Supreme Court rules on the deference issue, it could change the way the DOL interprets FLSA exemptions and the way it goes about changing existing interpretations of other wage and hour regulations (i.e., through amicus briefs and not the rule-making process);
• The Supreme Court's decision could have implications for employers that are seeking to reclassify employees as exempt under the outside sales or other FLSA exemptions; and
• It may have implications for employers that already utilize an outside sales force.

Stay tuned for more updates on this and other important wage and hour issues.