Hunton Employment & Labor Perspectives

On June 18, 2012, in Christopher, et. al. v. SmithKline Beecham Corp., the United States Supreme Court issued its first decision interpreting the so-called white collar exemptions under the Fair Labor Standards Act and finally resolved the circuit split over whether pharmaceutical sales representatives are exempt as outside salespeople.  This decision is not only a long-awaited victory for the pharmaceutical industry, but also a key win for employers in all industries. In Christopher, the Supreme Court held that pharmaceutical sales reps qualify for the outside salesman exemption and are not entitled to overtime wages. The Court also unanimously rejected the U.S. Department of Labor’s (“DOL”) attempt at back-door regulation through an amicus brief, delivering a blow to the DOL’s recent enforcement campaign.

The FLSA requires employers to pay overtime wages to employees, unless they fall within certain exemptions. At issue in the Christopher case was whether pharmaceutical sales representatives fall within the outside sales exemption since they do not “sell” directly to the end consumer.  In enacting the FLSA, Congress did not elaborate on the meaning of “outside salesman” but, instead, delegated authority to the DOL to issue regulations defining the term. Ultimately, although the DOL issued interpretive regulations, those regulations were ambiguous.

After litigation commenced around the country against the pharmaceutical industry, the DOL filed an amicus brief in In re Novartis Wage & Hour Litigation.  In its amicus brief, the DOL announced its position that pharmaceutical sales representatives did not fit within the outside salesman exemption. Relying heavily on the DOL’s position, the Novartis court agreed with the DOL and found pharmaceutical sales reps to be nonexempt employees entitled to overtime.  Just over a year later, in Christopher, et. al. v. SmithKline Beecham Corp., the DOL filed a similar amicus brief in the Ninth Circuit.  The Ninth Circuit, however, refused to accord “controlling deference” to the DOL’s interpretation of the outside salesman exemption, instead holding that SmithKline’s pharmaceutical sales reps were exempt employees.  The Ninth Circuit’s decision was appealed to the Supreme Court and the circuit split was confirmed, not only as to the proper classification of pharmaceutical sales representatives, but also as to whether and how much deference was owed to the DOL’s interpretations.   

In a 5-4 majority opinion, the Supreme Court held that pharmaceutical sales representatives are properly exempt. In so holding, the Court took a practical approach to its interpretation of the exemption, recognizing that pharmaceutical sales reps are akin to exempt outside salespersons in other industries given that their salaries are set much higher than minimum wage, their work typically cannot be completed in set timeframes, and their work does not require significant supervision.  According to the Supreme Court, the FLSA was not intended to protect employees with these characteristics.  This practical application of the exemption will be helpful to employers in all industries who typically argue in misclassification cases that FLSA exemptions should be construed practically, not based on technicalities in the regulatory or statutory language.

Interestingly, while there was a slim majority on the exemption question, the Court unanimously rebuked the DOL’s attempt to legislate through litigating positions contained in amicus filings.  In reaching this conclusion, the Supreme Court criticized the DOL for failing to provide fair notice that it viewed pharmaceutical sales reps as nonexempt employees.  Instead, for decades, the pharmaceutical industry treated its outside sales reps as exempt without challenge from the DOL. The Court emphasized that “agencies should provide regulated parties ‘fair warning’ of the conduct [a regulation] prohibits or requires” to prevent “unfair surprise.”  Because the DOL failed to satisfy the notice standard concerning the outside salesman exemption as it pertains to the pharmaceutical industry, deference to the DOL’s interpretation was not required, according to the Supreme Court. 

In recent years, the DOL has pursued an aggressive agenda of filing amicus briefs to push its agenda without the rigors of formal regulations and the notice and comment safeguards they entail. The Supreme Court’s decision sends a resounding message to the DOL and other government agencies that courts are free to reject such tactics and afford little weight to the DOL’s interpretations in such circumstances.