U.S. Supreme Court Decides Wage & Hour Case: Pharmaceutical Sales Personnel Not Entitled to Overtime Pay

U.S. Supreme Court Decides Wage & Hour Case: Pharmaceutical Sales Personnel Not Entitled to Overtime Pay

On June 18, 2012, in an opinion written by Justice Samuel Alito for a 5-4 majority, the U.S. Supreme Court held that pharmaceutical sales representatives are not entitled to overtime pay. The question before the Court was whether or not the sales reps were employed "in the capacity as outside salesmen" and therefore within an exemption in the Fair Labor Standards Act (FLSA)  from the overtime pay requirements. Because wage and hour disputes are a growing area of employment related litigation, the Court's opinion is potentially significant. It also has a number of other interesting features, as discussed below.  

The plaintiffs are two pharmaceutical sales representatives who were employed by  the defendant pharmaceutical company (which does business as GlaxoSmithKline) for about four years. During that time they worked about 50 to 70 hours a week. About 40 hours were devoted to field work, visiting doctors, with the rest of the time spent on office work (email, etc.). The purpose of their office visits was, as the Court put it, "obtain a nonbinding commitment from the physician to prescribe [defendant's] drugs." The plaintiffs "were well compensated for their efforts," earning over $70,000 annually, in base and incentive compensation. They were not paid overtime when they worked more than 40 hours per week.

The plaintiffs filed an action in federal court alleging that their employer violated the FLSA by failing to pay overtime. The company argued that because the plaintiffs were employed "in the capacity of outside salesmen" they were exempt from the FLSA's overtime requirements. The district court entered summary judgment in the company's favor. The plaintiffs them filed a motion with the court to alter or amend its motion, arguing that the district court failed to give appropriate deference to a Department of Labor interpretation of the FLSA regulation, which the plaintiffs contended supported their overtime claim. The district court rejected this argument and denied the motion.

The Ninth Circuit affirmed the lower court, agreeing that the Department of Labor's interpretation was not entitled to controlling deference. The Ninth Circuit's opinion conflicted with opinion out of the Second Circuit, and the Supreme Court granted a writ of certiorari to resolve the circuit split.

In both the Second and Ninth Circuit, the Department of Labor had submitted amicus briefs arguing that pharmaceutical sales representatives were not exempt from the FLSA overtime requirements. The DOL took the same position before the U.S. Supreme Court, although its reasoning changed on the point of what kind of activity makes something a "sale."

In taking up this case, one of the issues the Supreme Court had to decide is whether the agency's interpretation was entitled to "controlling deference." The Supreme Court held that the agency's interpretation was not entitled to controlling deference, in part because the position the agency took in the appellate courts diverged from decades of the agency's prior position on the question of whether or not pharmaceutical sales representatives were exempt from the overtime requirements. The Court went on to state that it found the DOL's interpretation "quite unpersuasive" and that it conflicted with relevant language in the FLSA itself.

Having concluded that it would not give the agency's interpretation controlling deference, the Court turned to the FLSA for its own interpretation. Based on its review, the majority concluded that the "most reasonable interpretation" is that the plaintiff's qualify as outside salesmen within the meaning of the statute and are therefore exempt from the FLSA's overtime requirement.

Justice Breyer, joined by Justices Ginsberg, Sotomayor and Kagan, dissented. He agreed with the majority that the DOL's interpretation was not entitled to controlling deference. However, he contended that the pharmaceutical sales representatives were not exempt salesmen, because, as he put it "unless we give the words of the statute and regulations some special meaning," the sales representatives duty is not to make a sale, but at most to "convince a doctor to prescribe a drug for a particular kind of patient." A sale, if it takes place at all, takes place at the pharmacy, or perhaps when the pharmacy purchases the drugs from distributors. Because there was no "sale" the representatives are not salesmen, and they are not exempt from the FLSA overtime requirements.

Discussion

For several years, wage and hour suits have been one of the fastest growing areas of employment-related claims. Among reasons for the growth in the number of these claims are the efforts of the employment law plaintiffs' bar to try to extend the laws' reach to higher paid positions, as this case appears to be an example.

At one level, this rruling in this case relates only to pharmaceutical sales representatives, or pharmaceutical detailers as they are sometimes called. That is no small thing,even if it is just limited to them. According to the opinion, there are over 90,000 pharma sales reps in the US. Not only that, but in January, Novartis agreed to pay $90 million to settle the class action overtime pay claims of its sales reps (refer here).

Indirectly the case may have a broader impact, particularly in the part of the majority opinion in which the court explores the reasons for the FLSA's overtime exemption for outside salespersons. The court emphasis on the fact that exempt employees usually earn salaries well above minimum wage and are involved in the kind of work that is difficult to standardize and therefore hard to spread to other workers, among other things, could be highly relevant in the event of overtime claims by other types of sales and marketing personnel.

By the same token, the Court's refusal to give the DOL controlling deference could make it harder for regulatory agencies to change their regulatory interpretations without given affected industries a chance to be heard, or merely because there has been a change in administrations. There would certainly seem to be less interest among regulatory agencies to try to regulate by way of amicus briefs.

The Court's emphasis on the exemption's application to higher compensated workers is particularly interesting. Indeed, after reiterating that the two plaintiffs make over $70,000 a year, Justice Alito states that the plaintiffs are "hardly the kind of employees that the FLSA was intended to protect." The phrase sounds like a warning against efforts to try to extend the FLSA to more highly compensated workers and may therefore prove highly relevant given recent wage and hour claims trends. 

The Court also emphasized that it had been the DOL's consistent position for decades that pharmaceutical detailers were exempt from the FLSA's overtime requirement. According to Justice Alito, the first time the agency took the position that the detailers were not exempt was in an amicus brief the agency filed with the Second Circuit in 2009. It seems to me that Justice Alito's emphasis of the date was deliberate. 2009 was of course the year when the current administration came into office -- the date suggests that the new administration threw out years of consistent practice in the area, on which the pharmaceutical companies had come to rely.

The inferential association of the agency's position with the current administration might be interpreted as the explanation of the way the Court split on this issue, with the Justices appointed by Republican Presidents on one side, and the Justices appointed by Democratic Presidents on the other. There's only one problem with that theory. Justice Breyer's dissent actually agrees with the majority opinion that the agency's interpretation is not entitled to controlling deference. That is, his opinion is not simply agreeing with the current administration's position. Rather, in his view the work of the pharmaceutical detailers was not really the work of outside salesman, and so therefore they are not exempt and are entitled to overtime pay. Basically, the way it works out is that the conservative judges favor a narrower scope for the overtime pay requirement, and the liberal justices favor a broader applicability of the overtime pay requirement.

It is pretty clear that one mistake the DOL made was in trying to change its explanation for its position on the application of overtime pay requirements to pharmaceutical detailers. Both the majority and the dissent cited that as among the reasons not to give the agency's interpretation controlling deference. In retrospect, the agency's decision to try to change its explanation looks like a poor tactical judgment. Even if they decided the prior explanation was less persuasive, the agency would have been better off sticking with the original explanation.

In a June 18, 2012 memo about the decision (here), the Mayer Brown law firm noted that the conclusion of both the majority and the dissent that the agency was not entitled to controlling deference "could have broader significance for other regulated industries" because it "could limit the ability of agencies to adopt regulatory interpretations that impose unexpected liability on regulated entities."

From the perspective of the insurance marketplace, a narrower application of the overtime pay requirement would be more desirable. Of course, the carriers are not responsible for the payment of unpaid wages in overtime pay cases. But many employment practices liability policies are written with sub-limited coverage (usually in the range of $100,000 to $250,000) for wage and hour claim defense costs. Wage and hour claims involving more highly compensated employees are more expensive to defend, because there is more at stake and are therefore harder to resolve. To the extent this decision discourages efforts to expand overtime pay requirements to higher compensated employees, it could reduce the carriers' wage and hour expense burden.

Opinion Day at the Supreme Court: Maybe the specter of something like the following is the reason why the Court won't allow cameras in the Court:

Chief Justice Roberts: Thank you, Samuel, for that great performance on behalf of the Stalwart Republican Quintet. I for one certainly enjoyed that rousing rendition of "Don't Cry for me Detailers, You Make a Bundle Anyway." And now with a dissenting opinion, it's that veteran performer, Southpaw Steve, accompanied by the Liberal Lady Justices Trio. Take it away, Steve.

Justice Breyer: Thank you, thank you very much. As I always say, a Supreme Court audience is the greatest audience in the world. You know, I just flew in from the Court's left wing, and boy, are my arms tired. Ha Ha! Um, is this thing on? (Tap, tap). OK, well, this morning we are going to perform the classic tune "All We Are Saying Is Give Detailers OT." Ready, ladies? Uh-one and-a two, and here we go...

I Don't Speak the Language, But I Think He is Trying to Tell Us That Portugal Scored: I want to share a great link with you, but first, here's a question. What do Greece, Spain, Portugal and Italy have in common? If you said, they are all at the heart of the Eurozone crisis, you have not been monitoring current events closely enough. The correct answer is that those four countries' national teams have qualified for the quarterfinals of the Euro 2102 soccer championship. Another quarterfinal qualifier is Germany. Which raises the possibility that the countries have the opportunity to solve the whole Eurocrisis on the playing field. Of course, the Czech Republic, France and England - the other three quarterfinal qualifiers -- might also have something to say, at least about the tournament. The quarterfinal schedule can be found here.

Speaking of Portugal, if you have not yet heard it, you should drop everything you are doing right now - RIGHT NOW, I MEAN IT -- and listen to this Portuguese announcer's call of Christiano Ronaldo's second goal in Portugal's 2-1win Sunday over The Netherlands. The goal not only guaranteed Portugal's qualification for the quarterfinals, but it also ensured that The Netherlands, which played in the World Cup finals just two years ago and in Euro 2012 fielded a lineup that looked like an all-star team, would be going home without winning or drawing a game in the group stages.

And by the way, in case you missed the article in yesterday's WSJ, it turns out that not only is Ronaldo among the best players in the world but he is also the hardest working man in sport, anywhere, period. He logged more playing time on the field in the past year than any other non-goalie athlete. He also appears to be one of the most durable. And he is one of the key reasons that Portugal is still around and will be taken very seriously in the next round.

Besides the Dutch, another team that is probably surprised to find itself going home is Russia. They were clearly playing for a draw Saturday night against Greece, which would have been sufficient for Russia to move on to the next round. But Greece snuck a quick goal at the very last tick of the clock in the first half when Russia's guard was down, and Russia could not recover. Russia probably still can't believe the whole thing. They are going home, yet the Czech Republic, whom Russia demolished by the score of 4-1 on June 8th, is advancing to the next round. (As Arsene Wenger, the coach for Arsenal in the English Premier league, and who is French, might say with a Gallic shrug: "Zat ees football.")

Spain, the defending Euro and World Cup Champions, clearly remain the favorite to win. (Indeed, some have argued that Spain's current squad is the greatest team ever, in any sport.) But I have to say, not one but two players were offside for Spain's lone goal Monday night in the final group stage game against Croatia. I make no predictions, but, you know, Germany played their group stage games damn well.  

In its final group stage game on Tuesday, England was also the beneficiary of an incredible blown call. In the second half of their game against Ukraine, England player John Terry's clearance kick was clearly too late, the Ukraine shot clearly having gone over the goal line. But the referee's assistant, who was after all right there, said it was not a goal. England of course will point out that Ukraine was offside on the play, so there shouldn't have been a goal anyway  (actually, in England they would say that Ukraine were offside but that particular usage has always sounded stilted to me).

The team that has the most to answer for is France. Sure, France qualified for the quarterfinals. But in their last game of the group stages against a Sweden side that had already been eliminated, France played poorly. The French team did not actually go on strike, the way they literally did at the World Cup in 2010, but they might as well have, losing to a spirited Sweden side, 0-2. For their efforts, or lack thereof, France draws Spain as their opponent in the next round. They play on Saturday, in Donetsk.

I Would Have Thought it Was Sufficient To Argue for a Change That Buckeye Fans Are Insufferable: I am not making this up. According to a report on Deadspin, an Ohio man wants to have the Buckeye removed as Ohio's State Tree because it is bisexual, having both male and female reproductive organs. Having such a tree as the state tree is, according to the man's letter to the Findlay (Ohio) Courier, "flaunting the Holy Bible." The Deadspin article notes that this would be pitch perfect satire -- if it were in fact satire. If is not satire, well, it is just depressing.

My friend and former law partner Chuck Hadden would want me to point out that the Ohio man should have said "flouting the Holy Bible" not "flaunting the Holy Bible."

Lexis.com subscribers can access a Lexis enhanced version of the Christopher v. Smithkline Beecham Corp., 2012 U.S. LEXIS 4657 (U.S. June 18, 2012) decision with summary, headnotes, and Shepard's.

Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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