Supreme Court: No overtime pay for pharmaceutical sales reps

Under the Fair Labor Standards Act, a company must pay overtime to non-exempt employees who work over 40 hours in a particular workweek. Non-exempt, huh? That implies that the FLSA also contains various exemptions from overtime pay for employees who meet those requirements. Indeed it does. One of those exemptions is called the “outside sales” exemption. To qualify for the outside sales employee exemption, all of the following tests must be met:

1. The employee’s primary duty must be making sales (as defined in the FLSA); and
2. The employee must be customarily and regularly engaged away from the employer’s place or places of business.

The pharmaceutical industry is chock full of sales representatives whose job it is to go to doctors’ offices and convince physicians to place orders with drug makers. However, these sales reps never actually transfer title to the drugs. That is illegal in the drug industry.

So then, the question is, do these sales reps qualify for the FLSA’s outside sales exemption? Well, funny you should ask, because that’s what the Supreme Court decided yesterday (here). Details after the jump…

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What the heck is an outside salesman?

Good question. The Fair Labor Standards Act doesn’t define that term. Because that would be too easy and I’d have nothing to write about today. Instead, the U.S. Department of Labor has implemented regulations which address this. And, if you scan up the page a bit, you’ll see a boiled-down version of that two-part test. 

But is the DOL interpretation of the law entitled to any deference when it comes to pharmaceutical sales representatives? Short answer: no. Well, at least that’s what the Supreme Court said. 

** Hear that? That’s the sound of the DOL getting slapped around. **

So, let’s go back to the FLSA itself. Although outside salesman is not defined, “sale” is. Sale includes any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.

Wait, why did Meyer just italicize “or other disposition?”

Because as I noted above, it is not legal for pharmaceutical sales representatives to actually transfer title to drugs from drug maker to doctor. Instead, the sales rep obtains a nonbinding verbal commitment from a doctor to order the drugs. So, although a pharmaceutical sales representative may not actually transfer title to the drugs (i.e., complete a traditional sale), if one were to take a function-over-form approach to pharmaceutical sales, you’d end up with a sales rep who is involved in the other disposition of drugs. As the Supreme Court put it, “This kind of arrangement, in the unique regulatory environment within which pharmaceutical companies operate, comfortably falls within the catchall category of ‘other disposition.'”

It follows then that pharmaceutical sales representations make sales under the FLSA and are thus exempt outside salesmen within the meaning of the FLSA. (Although not considered by the Supreme Court, one could also argue, as another drugmaker successfully did last month, that pharmaceutical sales representatives are also exempt pursuant to the administrative exemption).

So, why should you care?

If you happen to run a company that sells pharmaceuticals, oh, happy day! And if you run a business with a similar sales model similar, rest easier.

But even if you don’t, as Mark Toth at Manpower Group’s Employment Blawg notes here, the outcome of this case may check aggressive DOL enforcement efforts into gray areas of wage-and-hour law. Indeed, the Supreme Court criticized the “unfair surprise” that the DOL’s enforcement efforts created. Therefore, at the very least, the DOL may need to telegraph future wage-and-hour enforcement.