This month’s column discusses decisions issued by the U.S. Supreme Court during the 2011-12 term in the area of labor and employment law.

Outside Sales

In a major win for pharmaceutical companies, the court ruled 5-4 in Christopher v. SmithKline Beecham, No 11-204 (June 18, 2012), that pharmaceutical sales representatives (PSRs) qualify as “outside salesmen” and are therefore exempt employees under the Fair Labor Standards Act (FLSA). This decision resolved a circuit split and overruled In re Novartis Wage & Hour Litigation, 611 F3d 141 (2d Cir. 2010), which held PSRs are not exempt under the FLSA.

Given the strict regulation of the pharmaceutical sales industry, it is illegal for PSRs to sell prescription drugs. Instead, PSRs approach physicians to solicit a “nonbinding commitment” to prescribe the drugs sold by their employer in appropriate cases. The PSRs employed by SmithKline Beecham, who consistently worked more than 40 hours each week, were paid a base salary plus performance-based incentives, but were never paid overtime wages. They brought suit alleging their employer violated the FLSA by failing to compensate them for overtime.

The district court rejected the employees’ claim and granted summary judgment to SmithKline Beecham, holding the PSRs were outside salesmen within the meaning of the FLSA exemption; the Ninth Circuit affirmed. The Supreme Court also affirmed, holding that, at least in the highly regulated environment of pharmaceutical sales, the PSRs were engaged in sales even though physicians do not actually purchase prescription drugs from them. The court explained that the FLSA broadly defines “sale” to include “any sale, exchange, contract to sell, consignment for sale, shipment for sale or other disposition.” It concluded the “catchall phrase ‘other disposition’ is most reasonably interpreted as including those arrangements that are tantamount, in a particular industry, to a paradigmatic sale of a commodity,” and that the PSRs’ efforts to persuade physicians to prescribe their employer’s drugs met this standard.

The court declined to defer to the position of the U.S. Department of Labor in its amicus brief that an employee does not make a “sale” unless he actually transfers title to the property at issue. While Labor Department interpretations are ordinarily accorded substantial deference, the court concluded its interpretation here was, in effect ex post facto, arrived at following decades of silence with respect to the pharmaceutical industry’s longstanding practice of treating PSRs as exempt outside salesmen. Moreover, the court found the Labor Department’s interpretation was flatly inconsistent with the FLSA which defines “sale” to include a “consignment for sale,” and a consignment for sale does not involve the transfer of title.

Justice Stephen Breyer issued a dissent, asserting: “Given the fact that the doctor buys nothing, the fact that the [PSR] sells nothing to the doctor, and the fact that any ‘nonbinding commitment’ by the doctor must, of ethical necessity, be of secondary importance, there is nothing about the [PSR's] visit with the doctor that makes the visit…’tantamount…to a paradigmatic sale.’”

Ministerial Exception

In Hosanna-Tabor Evangelical Lutheran Church & School v. EEOC, 132 SCt 694 (Jan. 11, 2012), the court unanimously ruled that the Establishment and Free Exercise Clauses of the First Amendment protect religious institutions from employment discrimination litigation regarding their ministers. Thus, the court for the first time recognized the “ministerial exception” to federal workplace anti-discrimination laws which had been uniformly accepted by the Courts of Appeals.

Cheryl Perich, a commissioned minister, was employed as a teacher by the Hosanna-Tabor parochial school. She taught kindergarten, fourth grade and a religion class. When Perich took a medical leave of absence for narcolepsy, school officials hired a replacement and advised Perich to resign. Following her threat of legal action, the school fired her claiming her actions did not adhere to Lutheran religious tenets.

Perich filed an EEOC charge, alleging her termination violated the Americans with Disabilities Act (ADA). The Equal Employment Opportunity Commission brought suit under the ADA against Hosanna-Tabor, but the district court concluded the claims were barred by the ministerial exception and dismissed the lawsuit. The U.S. Court of Appeals for the Sixth Circuit ruled that although there was an exception, Perich did not qualify as a minister because her duties did not primarily involve teaching or spreading the faith.

The Supreme Court first confirmed that there is a ministerial exception, grounded in the First Amendment. It stated that requiring a church to accept a minister it did not want would infringe on a religious group’s right under the Free Exercise Clause “to shape its own faith and mission through its appointments” and would violate the Establishment Clause, which “prohibits government involvement in such ecclesiastical decisions.”

Although the court declined to adopt a formula for deciding whether an employee qualifies as a minister, it emphasized that the exception is not limited to workers who perform exclusively religious functions. The court then overruled the Sixth Circuit by finding Perich was a minister for purposes of the exception, emphasizing that she was required to complete substantial religious training to become a commissioned minister and her job duties entailed religious responsibilities, including teaching a religion class and leading prayer services, daily devotional exercises and several chapel services. The court did not find dispositive the amount of time she spent on secular duties in relation to her religious duties.

The court expressly declined to address whether the ministerial exception could be invoked in other types of suits brought by ministers against religious employers, such as breach of contract or tort claims.

Union Notice

In Knox v. Service Employees Int’l Union, No 10-1121 (June 21, 2012), the court held 7-2 that a public-sector union must provide the requisite “Hudson notice” and also receive affirmative consent from non-members, prior to imposing a special assessment or other mid-year dues increase.

States may establish “agency shop” arrangements for their public-sector employees, under which the employees may elect by majority vote that all bargaining unit employees will be represented by a union. All bargaining unit employees, whether they formally join the union or not, are charged dues to compensate the union for its work on behalf of the employees. In Abood v. Detroit Bd. of Educ., 431 US 209 (1977), the court held that a public-sector union may charge non-members for “chargeable expenses” related to collective bargaining but may not require non-members to fund the union’s political and ideological activities. In Teachers v. Hudson, 475 US 292 (1986), the court established procedural requirements that a union must meet to collect fees from non-members. These requirements include providing notice, known as a Hudson notice, of the percentage of fees that will fund non-chargeable expenses and the opportunity for non-members to opt out of contributing to these expenses.

Here, the SEIU (a public-sector union) sent its annual Hudson notice in June 2005, informing bargaining unit employees that approximately 56 percent of its total expenditures would be dedicated to chargeable expenses and 44 percent would fund non-chargeable expenses, and giving non-members 40 days to opt out of contributing to the non-chargeable expenses. After the opt-out window under the annual Hudson notice had closed, the SEIU sent bargaining unit employees a letter indicating that, for a limited time, union fees would be raised in order to fund an SEIU political initiative.

Non-members were not given an opportunity to opt out of the special assessment. Instead, non-members who had objected to the previous Hudson notice were required to pay only 56 percent of the new assessment, and employees who had not objected to the previous notice had to pay the entire assessment. Petitioners filed a class action on behalf of 28,000 non-members, arguing the union improperly required non-members who had objected to the original Hudson notice to pay 56 percent of an assessment devoted to political expenditures they found objectionable, and improperly denied non-members who had not objected to the original Hudson notice a chance to object to the special assessment.

The court concluded there was no justification for the SEIU’s failure to send a new Hudson notice when it implemented the special assessment, emphasizing that compelling non-members to pay for a union’s political objectives amounts to compelled speech and compelled association under the First Amendment. Thus, the court stated that procedures unions use to collect fees from non-members must be “carefully tailored to minimize the infringement” on their free speech rights. The court rejected the SEIU’s argument that objecting non-members could recoup the fees the following year by opting out during the next Hudson notice because the union would still be receiving an impermissible loan from non-members. It ruled that when a public-sector union imposes a special assessment or other increase that was not contemplated in the annual Hudson notice, “the union must provide a fresh Hudson notice and may not exact any funds from non-members without their affirmative consent,” i.e., an opt-in feature.

Health Care

In a highly anticipated decision, the court in National Federation of Independent Business v. Sebelius, No 11–393 (June 28, 2012), upheld the constitutionality of the key provisions of the Patient Protection and Affordable Care Act of 2010 (ACA). In a 5-4 opinion, the court concluded that Congress had the constitutional authority under its taxing power to require most Americans to purchase health insurance or make a “shared responsibility payment” to the Internal Revenue Service.

The court’s decision means that employers and plan sponsors need to be prepared to comply with the requirements of the ACA. Some of the requirements that will take effect in 2012 and 2013 are: (i) effective for all annual enrollment periods that begin on or after Sept. 23, 2012, plan sponsors will be required to provide employees on the first day of the enrollment period a Summary of Benefits and Coverage, which concisely and accurately describes the benefits and coverage under the plan in an understandable manner; (ii) effective for the 2012 tax year (for W-2 forms issued in January 2013), employers are required to report the value of health coverage on employees’ W-2 forms (employers that issue fewer than 250 W-2 forms are currently exempt); and (iii) starting in January 2013, the amount employees may contribute to a flexible spending account for medical expenses will be limited to $2,500 per year, increased annually by the cost of living adjustment. In addition, beginning in 2014: (i) the “play or pay” mandate will require each large employer (generally an employer with 50 or more full-time employees) to either provide employees with a specified minimum level of health coverage or pay a penalty; (ii) fully insured group health plans will be barred from discriminating in favor of highly compensated individuals regarding coverage and benefits; and (iii) employers with more than 200 employees will be required to automatically enroll new full-time employees in group health plans.

With the constitutionality of the ACA now settled, the regulatory agencies will continue to issue guidance on the various provisions as their effective dates arrive, and employers will have to focus on managing complex compliance issues.

Immigration Law

In Arizona v. United States, No 11-182 (June 25, 2012), the court held 5-3 that a provision of Arizona law that made it a crime for unauthorized aliens to seek or engage in work in the state was preempted by the federal Immigration Reform and Control Act (IRCA).

In relevant part, the Arizona law made it a misdemeanor for “an unauthorized alien to knowingly apply for work, solicit work in a public place, or perform as an employee or independent contractor” in Arizona. The IRCA imposes only civil penalties on unauthorized aliens who seek or engage in unauthorized work. While IRCA’s express preemption provision was silent on the issue, the court found the legislative history made it clear that Congress deliberately chose not to impose criminal penalties on unauthorized aliens who seek or engage in employment. Since Arizona’s law presented a “conflict in the method of enforcement,” it was preempted by the IRCA.

John P. Furfaro is a partner at Skadden, Arps, Slate, Meagher & Flom. Risa M. Salins is a counsel at the firm. Ngoza V. Anidi, a summer associate at the firm, assisted in the preparation of this article.