Argument preview: The “outside salesman” exception to the FLSA’s overtime-pay requirement

Sam Wieczorek is an associate attorney with Fuchs & Roselli, Ltd, in Chicago. He graduated cum laude from Loyola University Chicago School of Law in 2007. His practice is concentrated in business law.

I. Introduction

On April 16, the Court will hear arguments in Christopher v. SmithKline Beecham Corp. The Justices will decide, once and for all, whether pharmaceutical sales representatives (PSRs) are “outside salesmen” and thus exempted from overtime-pay requirements of the Fair Labor Standards Act of 1938 (FLSA) The decision will also settle a circuit split between the Second and Ninth Circuits:  the former held that PSRs are not outside salesmen and thus are not exempted from the FLSA’s requirement that they be paid overtime wages, while the Ninth Circuit (in this case) unanimously reached the contrary conclusion. This will be an interesting case with wide-ranging ramifications for the pharmaceutical industry and the ninety thousand people nationwide employed as PSRs.

II. Factual background

The facts of this case are not terribly complicated. SmithKline Beecham Corp. (doing business as GlaxoSmithKline (Glaxo)) is a multinational company that develops, manufactures, markets, and sells pharmaceuticals. Michael Shane Christopher and Frank Buchanan were once employed as PSRs for Glaxo; Christopher was terminated by Glaxo in May 2007, while Buchanan accepted a PSR position with another pharmaceutical company.

To understand the typical duties of a PSR, it is necessary to understand the concept of an “ultimate user” in pharmaceutical lingo. An “ultimate user” is the patient who actually takes the prescribed medicine. Under the Controlled Substances Act of 1970, no one, including drug manufacturers, can dispense prescription medicine without a physician’s authorization. Because the drug manufacturers cannot sell their prescription medications directly to the public, they sell the medications to distributors or retail pharmacies, who then dispense the medications to an “ultimate user” who presents a proper physician’s authorization.

Within this framework, Glaxo employs PSRs to make calls on physicians. At a call, the PSRs will typically present information and samples to the physician and attempt to convince the physician to prescribe their employer’s pharmaceuticals instead of the competition’s.

PSRs work almost entirely outside of Glaxo’s offices. Most of a PSR’s time is spent traveling to physicians’ offices within a specified geographic region. A PSR will ordinarily make eight to ten physician calls per day, usually between 8:30 a.m. and 5:00 p.m.  When not making physician calls, PSRs will study Glaxo products and relevant disease states. They will prepare new presentation modules, respond to phone calls and e-mails, generate reports, and attend evening and weekend seminars. These tasks are typically performed outside of customary business hours.

PSRs have been performing these same basic job functions for the past fifty to sixty years. In addition, their job duties are uniform across all drug manufacturers. So a PSR for Glaxo performs basically the same job duties as for any other pharmaceutical company.

Of critical importance to this case is the fact that PSRs cannot sell samples, take orders for any medications, or negotiate drug prices or contracts with physicians or users. Instead, they can only try to convince physicians to prescribe Glaxo products instead of its competitors’ products.

For their services, PSRs receive two types of payment: salary and incentive-based compensation. Glaxo aims to have its PSRs receive seventy-five percent of their payment as salary and twenty-five percent as incentive-based compensation. However, the amount of incentive-based compensation a PSR can receive is unlimited. In general, a PSR’s incentive-based compensation is calculated by measuring the increase of Glaxo’s market share for a particular drug within the PSR’s territory.

Glaxo classifies PSRs as “outside salesmen” who are not entitled to overtime pay for hours worked in excess of forty in a workweek. In this case, Christopher and Buchanan allege that they typically worked ten to twenty hours each week outside of normal business hours, for which they should have received overtime pay.

III. Procedural History

Christopher and Buchanan filed a putative class action alleging that Glaxo had violated the FLSA by improperly classifying PSRs as exempt employees, and thereby failing to pay overtime wages. The district court granted summary judgment in favor of Glaxo, finding that PSRs are exempt “outside salesmen.” After the Department of Labor filed an amicus brief in the Second Circuit case expressing its position that PSRs are not outside salesmen, Christopher and Buchanan filed a motion to amend or alter the judgment, which the district court denied. On appeal, the Ninth Circuit affirmed.

IV. Analysis

There are two issues before the Court.  The first is whether it owes deference to the Department of Labor’s interpretation of its regulations. The second is whether PSRs are outside salesmen when they cannot legally sell prescription drugs, but instead can only encourage physicians to prescribe their employer’s drugs.

In both the Second Circuit and this case, the Secretary of Labor filed an amicus brief in support of the PSRs. However, the courts in each of those cases split on whether the Secretary’s interpretation of the Department’s regulations warranted deference:  the Second Circuit held that it did, while the Ninth Circuit held that it did not.

As background, when Congress has not spoken directly to an issue in one of its statutes, the courts will generally defer to an administrative agency’s interpretation of that agency’s own regulations unless that interpretation is plainly erroneous or inconsistent. This concept is known as Auer deference, from the Court’s 1997 decision in Auer v. Robbins.

The main thrust of the Ninth Circuit’s holding is that, because the Department’s regulations merely paraphrase the language of the FLSA, rather than adding any interpretation of that language, no deference is warranted, and the court should look solely to the text of the FLSA.  More specifically, the Ninth Circuit found that rather than define “sale” by, for instance, setting forth a test for a sale, the Department’s regulations merely direct the reader back to the definition of “sale” in the FLSA at Section 3(k).  Thus, when the Ninth Circuit looked to the Secretary’s amicus brief, it found that rather than using the brief to apply the Department’s regulations to the facts of the case, the Secretary impermissibly used the brief to reinterpret the FLSA.   Moreover, even if the deference were warranted, the Ninth Circuit found that the interpretation is incorrect.   It reasoned that the argument made by Christopher and Buchanan “ignores the reality of the nature of the work” performed by PSRs. Unlike conventional salespeople, PSRs legally cannot sell the pharmaceuticals they are promoting. Instead, they do the next-best thing:  they attempt to obtain from physicians a nonbinding commitment to prescribe their employer’s drugs when medically appropriate.  Such a nonbinding commitment, the Ninth Circuit reasoned, is a sufficiently meaningful exchange that Glaxo is willing to provide its PSRs with increased incentive-based compensation for receiving these commitments.

The Ninth Circuit then looked to the Tenth Circuit’s 1941 decision in Jewel Tea Co. v. Williams for guidance as to the purpose of the outside salesman exception.  In that case, the court gives the classic justification for the outside salesman exception – viz., outside salespeople work largely without supervision, for as many (or as few) hours as he or she desires. In lieu of overtime compensation, the salespeople receive commissions, which can presumably be increased by devoting more hours to the salesperson’s duties. In addition, his or her employer has no real way of knowing how many hours per day the salesperson has worked, and tracking those hours is incompatible with the individualized, out-of-the-office character of the salesperson’s job.  The Ninth Circuit goes on to cite nine instances where the duties of the traditional salesperson (as discussed in Jewel Tea) overlap with the duties of PSRs in the pharmaceutical industry.

Finally, the Ninth Circuit emphasized that for more than seventy years, the Secretary of Labor has – by not objecting – acquiesced in the conventional wisdom that PSRs are outside salesmen.  Not until the Second Circuit decision did the Secretary ever file an objection.

The real heart of this case is whether PSRs “make sales” within the meaning of the FLSA. If they do, then they would likely fall under the “outside salesmen” exception and would not be entitled to overtime pay. If they don’t, then they are likely owed overtime pay.

Christopher and Buchanan argue that they did not make sales for Glaxo. Instead, they claim they merely promoted sales for Glaxo.

Glaxo, by contrast, argues that the Court should define “sale” in the FLSA in a common-sense fashion, pointing to the fact that the definition of “sale” includes the catchall phrase “other disposition,” which would encompass the activities of PSRs on their physician calls.

V. Argument Preview

When the Court hears oral arguments on this case, it must decide whether the Department of Labor’s recent change of heart is owed Auer deference. Then it must determine whether PSRs “make sales” within the framework of the FLSA.

The stakes are high for this case:  there are at least 90,000 PSRs working in the United States for the various pharmaceutical manufacturers. Clearly, if these manufacturers need to begin tracking and paying overtime, there will be significant changes to how the PSRs work and how their hours are tracked. In addition, there is likely to be an economic impact as the price of paying these overtime wages would likely be incorporated into prescription drug prices.

[Disclosure:  The law firm of Goldstein & Russell, P.C., whose attorneys contribute to this blog in various capacities, represents petitioners in this case.  The author of this post, however, operates independently of the law firm.]