The Supreme Court recently held that pharmaceutical sales representatives who inform doctors about prescription drugs but do not actually sell drugs are ?outside salesmen? under the Fair Labor Standards Act, and are thus exempt from federal overtime laws. In Christopher v. SmithKline Beecham Corp., 132 S.Ct. 2156 (2012), the Court also limited the deference given to federal agencies in interpreting ambiguous federal regulations, especially in cases where an agency does not warn the public about major shifts in positions.
Background
Generally, the Fair Labor Standards Act (?FLSA?) provides for overtime benefits for some categories of employees. Id. at 2161.? However, one exempt category is for ?outside salesmen,? which is not defined within the FLSA but by Department of Labor (?DOL?) regulations.? Id.? Three DOL regulations, ? 541.500; ? 541.501; and ? 541.503 are relevant. Id. at 2162.
The first regulation defines ?outside salesmen? as ?any employee whose primary duty is making any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.?? The second regulation expands ?sale? to also include transfer of title to tangible property and in some cases, intangible property. Id.
In contrast, the third regulation deals with employees engaged in ?promotion work.?? Such work that is ?performed incidental to and in conjunction with an employee?s own outside sales or solicitation is exempt work, where as promotion work that is incidental to sales made, or to be made, by someone else is not exempt outside sales work,? meaning that the former, exempt employee is outside of the FLSA?s overtime provisions, whereas the latter is eligible. Id.
Some employees of SmithKline worked as detailers, or pharmaceutical sales representatives.? These detailers visited physicians to provide them with information on SmithKline?s various prescription drugs with the goal of increasing prescriptions.? Detailers would obtain a ?nonbinding commitment? from physicians to prescribe the drugs to patients, but the detailers did not sell, supply, or take orders for the drugs.? The detailers were compensated through salary and bonuses, which were dependent on sales levels of SmithKline?s drugs within a detailer?s assigned geographic area. Id. at 2164.
Two of SmithKline?s detailers sued their employer in the District Court of Arizona, claiming violations of the FLSA.? The detailers alleged that under the FLSA, they were owed overtime pay for time worked in excess of 40 hours per week.? To support their claim, the detailers cited an amicus brief filed by the DOL in a similar case in the Second Circuit.? The brief represented the DOL?s interpretation of its regulations of the FLSA.? Id.
The District Court held in favor of SmithKline on summary judgment.? The District Court found that the FLSA?s overtime provisions did not apply to the detailers due to a statutory exception which exempted ?outside salesmen? from overtime pay.? The District Court found that the detailers were indeed outside salesmen, and thus granted summary judgment for SmithKline.? Id.
In a post-judgment motion, the detailers alleged that the District Court did not accord controlling deference to the DOL?s interpretation of ?outside salesmen,? which if controlling, would favor the employees by narrowing the definition of ?outside salesmen? to only those salesmen who pass title on goods (which was not the case with the detailers).? The District Court denied this motion.? Id. at 2165.
On appeal, the DOL filed an amicus brief with the Ninth Circuit, reaffirming its position that ?outside salesmen? should be interpreted to only those salesmen who pass title.? The Ninth Circuit rejected the DOL?s position, noting first that the DOL was not entitled to controlling deference in interpreting its own regulations in this case.? Id.
Second, on the status of the SmithKline detailers, the Court reasoned that ?because the commitment that petitioners obtained from physicians was the maximum possible under the rules applicable to the pharmaceutical industry, petitioners made sales within the meaning of the regulations.? Id.? The Court also noted that a previous DOL interpretation of ?outside salesmen? carried a broad interpretation that required ?outside salesmen? to merely ?in some sense?make a sale.?? Id.? Thus, the Court found that the detailers were ?outside salesmen? and affirmed the District Court.? Id.
The Ninth Circuit?s holding created a split with the Second Circuit?s holding in In re Novartis Wage and Hour Litigation, 611 F.3d 141 (2010), which held that the DOL?s interpretation in a similar case was entitled to controlling deference. Id.? The Supreme Court addressed the split and the status of the detailers in this case.
Supreme Court Defines FLSA?s ?Outside Salesmen? Exception to Overtime
The central issue before the Supreme Court was whether the two detailers were ?outside salesmen? under the FLSA and its definition under DOL regulations.? Id.? Such determination would answer whether the detailers were eligible for overtime benefits.? The analysis for the Court involved interpreting the statute and its DOL regulations to find the contours of ?outside salesmen.? The Court then applied that analysis to rectify the detailers? ambiguous status under the FLSA.?
Court Declines to Grant Controlling Deference to Agency?s Interpretation of Regulations
On the issue of whether the Court should grant the DOL controlling deference on the interpretation of its regulations defining ?outside salesmen,? the Court was guided by Auer, which ?ordinarily calls for deference to an agency?s interpretation of its own ambiguous regulation, even when that interpretation is advanced in a legal brief.?? Id. at 2166.? However, the Court noted several exceptions where granting controlling deference is inappropriate, including 1) when the agency?s interpretation is plainly erroneous or inconsistent with the regulation; or 2) when the interpretation does not reflect fair and considered judgment by the agency, such as when the interpretation conflicts with a prior interpretation or is viewed merely as a convenient litigating position. Id.
The Court determined that the DOL?s interpretation of its regulations defining ?outside salesmen? fell within an exception to Auer, and withheld controlling deference.? Id. at 2167.? Seemingly tantamount to the Court?s reasoning was the DOL?s apparent violation of the principle that ?agencies should provide regulated parties fair warning of the conduct that a regulation prohibits or requires.?? Id.? The Court found that prior to this case, the DOL had never initiated any enforcement action in regards to detailers over the course of several decades.? Id. Thus, the Court seemingly thought that the DOL never considered the industry in violation of the FLSA until the course of this litigation and providing no fair warning to the industry. Id.? In the end, the Court held that the controlling deference for the DOL?s interpretation was ?unwarranted,? and proceeded to interpret the DOL?s regulations as merely persuasive authority. Id. at 2168-69.?
The Court similarly rejected the DOL?s interpretation as unpersuasive. Id. at 2169.? The DOL?s interpretation requires that actual transfer title to goods is necessary to qualify as an ?outside salesman,? creating a very high bar for employers seeking to exempt employees from overtime.? Id.? The Court found this interpretation contradictory to the regulations themselves.? For example, the regulations state that a sale may include a transfer of title, stating a permissive rather than mandatory element. Id.? In addition, the regulations define ?sale? to include a ?consignment for sale,? which does not involve a transfer of title. Id.? Thus, the Court rejected the DOL?s interpretation outright due to its conflict with the actual text of the regulations.?
The Court then examined the language of the three regulations, finding a very expansive reading of the kind of ?sales? that would qualify an employee to be an ?outside salesman.?? Id. at 2170.? Specifically, the Court focused on the catch-all category of ?other dispositions,? which the Court defined as ?those arrangements that are tantamount, in a particular industry, to a paradigmatic sale of a commodity.?? Id. at 2171.
In this case, the Court found that a detailer obtaining a nonbinding commitment from a physician is ?the most that petitioners were able to do to ensure the eventual disposition of the products that respondent sells,? and thus within the context other regulations of pharmaceutical sales, ?comfortably falls? within the category of ?other disposition.?? Id. at 2172.? Thus, the Court found that the detailers were indeed ?outside salesmen? under the FLSA.? Id. at 2174.
The Court buttressed this finding by first finding that the detailers ?bear all of the external indicia of salesmen,? such as being trained in sales, working away from the office, and working for incentive compensation. Id. at 2172-73.? Second, the Court thought that because the detailers typically earned salaries well above the minimum wage (around $70,000 per year), the petitioners were ?hardly the kind of employees the FLSA was intended to protect.?? Id. at 2173.?
Dissent: Detailers Do Not Sell; Carry Out Only Promotional Work
The Dissent, led by Justice Breyer, found that detailers were not ?outside salesmen? but rather carried out ?promotional work? as defined by the third regulation.
The Dissent glossed ?outside salesman? to require that an employee?s ?primary duty must be making sales within the meaning of section 3(K).?? Id. at 2176.? Section 3(K) defines ?sale? to include ?any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.?? Id.
The Dissent argued that the detailers clearly did not make ?sales? under the definition above.? The Dissent highlighted that pharmacists sold prescription drugs, not detailers.? Id.? And in fact, the detailers? primary duty was to provide information to doctors about prescription drugs, and not to sell.? Id. Unlike the majority, the dissent found little meaning in a detailer obtaining a ?nonbinding commitment? from doctors, arguing that ?a commitment to advise a client to buy a product is not to obtain a commitment to sell that product.? Id. at 2177 (emphasis in original).?
In contrast, the Dissent categorized the detailers under the third regulation, or ?promotion work,? which is defined as an employee?s promotional activities made to stimulate sales of another.? Id.? The Dissent supported this by examining industry publications, which said that the primary responsibility of detailers is to provide information to support sales by pharmacists and wholesalers.? Id.? Further, the Dissent also cited DOL reports from 1940 and 1949 which emphasized the division of labor between employees carrying out promotional work and those making the actual sales, thus buttressing the its central argument that the detailers were not ?outside salesmen? but rather carrying out non-exempt ?promotional work.?? Id. at 2178.?
The Dissent rejected what it referred to as the Majority?s ?most they are able to do? test.? Id. at 2179.? The dissent warned against the assumption perhaps made by the Majority that ?there is in nearly every industry an outside salesman lurking somewhere (if only we can find him),? noting that perhaps some industries simply do not utilize ?outside salesmen.? Id.
Conclusion
The Supreme Court has limited a federal agency?s ability to enjoy controlling deference in litigation involving an agency?s own ambiguous regulations, thus granting courts greater leeway in interpreting such rules.? Further, the Supreme Court?s application of ?outside salesmen? to detailers may have implications beyond the pharmaceutical industry for employers and employees alike.? To find out how SmithKline may impact your company?s wage policies or potential litigation, you should contact experienced employment counsel.
Source: http://www.lawupdates.com/commentary/ichristopher_v._smithkline_beecham_corp._i/
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