The U.S. Supreme Court’s 5-4 decision in Christopher v. SmithKline Beecham Corp. that pharmaceutical sales representatives (PSRs) were properly classified as exempt employees for overtime purposes was a major victory for the pharmaceutical industry and employers generally. The decision also represents a significant restriction on the ability of the U.S. Department of Labor and other federal agencies to implement new interpretations of federal statutes and regulations through the filing of amicus briefs.

Issues In The Case

PSRs like the petitioners in Christopher call upon physicians and seek to educate them about the products of the PSR’s company, with the goal of influencing decisions about what drugs the doctors prescribe. PSRs cannot sell prescription drugs directly to end-users because they must be prescribed for patients by a licensed professional. The patients generally purchase the prescribed products at pharmacies, which purchase them from wholesale distributors. Consistent with longstanding industry practice, PSRs target the prescribing physicians because in most cases they determine what drug the patient will ultimately buy at the pharmacy.

Section 213(a)(1) of the Fair Labor Standards Act (FLSA) exempts from the law’s overtime pay requirements workers who are employed “in the capacity of outside salesman.” SmithKline Beecham (now known as GlaxoSmithKline) classified petitioners as exempt outside salesmen and did not pay them overtime. Petitioners claimed they were entitled to be paid for overtime hours because as PSRs they did not actually sell products to anyone and therefore did not fit within the outside salesman exemption. The company countered that physicians were the real “customers” and the focus of sales efforts by the PSRs, who were hired for their sales experience and trained in specialized sales techniques. The company also argued that PSRs were highly paid with commissions that were contingent on their success convincing physicians to write more prescriptions for company products.

The U.S. Court of Appeals for the Ninth Circuit decided that the PSRs were properly classified as exempt under the “outside sales” exemption. It also held that the court was not required to defer to a regulatory interpretation advocated by the federal Labor Department in an amicus brief that the outside sales exemption did not apply to PSRs. Petitioners appealed to the Supreme Court, where the Labor Department filed another amicus brief.

No Deference

Congress did not define “outside salesman” in the FLSA, but the Labor Department promulgated regulations concerning this exemption in 1938, 1940 and 1949, and reissued them with minor amendments in 2004 following notice-and-comment procedures. At the Supreme Court, the parties in Christopher agreed that the regulations themselves were entitled to deference, but disagreed sharply over whether the Labor Department’s interpretation of the regulations as advocated in its amicus brief was owed deference under Auer v. Robbins (519 U.S. 452 (1997)). This turned out to be a crucial and significant issue in the case.

The Labor Department first announced its view that PSRs are not exempt outside salesmen in 2009, in an amicus brief filed in the U.S. Court of Appeals for the Second Circuit, and it subsequently filed similar amicus briefs in other cases, including Christopher. In a remarkable rebuke to the Labor Department, both the majority and the dissenters in Christopher agreed that department’s opinions of this sort that are stated for the first time in amicus briefs should not automatically be accorded favorable weight. The opinion also scolded the Labor Department for seeking to impose its regulatory interpretation on the federal courts without first engaging in the sort of notice-and-comment rulemaking that traditionally precedes a federal agency’s issuance of interpretive guidance about the laws that the agency enforces.

The Supreme Court noted that the amicus brief method chosen by the Labor Department to announce new regulatory interpretations about the outside sales exemption had unfairly surprised the pharmaceutical industry: “Petitioners invoke the department’s interpretation of ambiguous regulations to impose potentially massive liability on respondent for conduct that occurred well before that interpretation was announced. To defer to the agency’s interpretation in this circumstance would seriously undermine the principle that agencies should provide regulated parties ‘fair warning of the conduct [a regulation] prohibits or requires.’”

The Supreme Court pointed out that, until 2009, the pharmaceutical industry had little reason to suspect it was not in compliance with the FLSA when it treated PSRs as exempt employees, since the statute and applicable regulations did not compel that view and, despite decades-long practice, the Labor Department had “never initiated any enforcement actions with respect to [PSRs] or otherwise suggested that it thought the industry was acting unlawfully.” The court found that the Labor Department’s 2009 reinterpretation of the outside sales exemption was not entitled to deference under Auer inasmuch as granting such deference would permit the agency to avoid the procedural safeguards of the rulemaking process: “It is one thing to expect regulated parties to conform their conduct to an agency’s interpretations once the agency announces them; it is quite another to require regulated parties to divine the agency’s interpretations in advance or else to be held liable when the agency announces its interpretations for the first time in an enforcement proceeding and demands deference.”

The dissenting opinion did not dispute the conclusion of the majority on the deference issue, and in fact agreed that “we should not give the Solicitor General’s current interpretive view any especially favorable weight.”

Impact Of Refusal

The Supreme Court’s refusal to defer to the Labor Department’s interpretation played an important role in the outcome of the Christopher case, but it is likely to affect future cases and agency actions as well. All federal agencies need to take the court’s deference analysis into account when they consider using an amicus brief to advance an interpretation that has not been publicly vetted in a notice-and-comment process.

In a case where an agency interpretation could result in substantial liability to a business, the Labor Department and other agencies should be prepared to establish that they gave “fair warning” to those affected by the interpretation and did not apply it retroactively.

Exempt Status

In deciding the central issue of the case, the court focused on the FLSA language exempting anyone employed “in the capacity” of an outside salesman. The Supreme Court said the use of “capacity” suggested the need for a functional analysis that takes into account how the employee functions in the context of a particular industry. Using this approach, the court viewed the special legal restrictions of the pharmaceutical industry as reinforcing, rather than undercutting, the exempt status of the PSRs. Since obtaining a nonbinding commitment from a physician to prescribe a particular drug was “the most that petitioners were able to do to insure the eventual disposition of the products” sold by their employer, the Supreme Court reasoned that within the pharmaceutical industry their activities easily met the definition of “sale” in Section 203(k) of the FLSA: “any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition” (emphasis added). The Supreme Court commented that, as used in the FLSA, the 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.”

The Supreme Court noted that the PSRs at issue were hired for their sales experience and trained to “close each sales call” by obtaining the maximum possible commitment from the physician. The court also took into consideration that the PSRs earned an average of more than $70,000 per year and spent between 10 and 20 hours outside normal business hours each week performing work related to the PSR’s assigned portfolio of drugs in the assigned sales territory. Taking these factors into consideration, the majority concluded that the PSRs “are hardly the kind of employees that the FLSA was intended to protect.”

Significance Of Decision

The decision in Christopher could have significant effects on future litigation about overtime exemptions. First, the Supreme Court’s interpretation of the outside sales exemption expressly declined to follow the notion advocated by plaintiffs in wage and hour cases that statutory exemptions from overtime should be “narrowly construed.” Exemptions should not be narrowly construed, the court said, when employers assert them based on “a general definition that applies throughout the FLSA.”

The employer in Christopher relied on the FLSA’s general definition of “sale.” Employers in other overtime cases should be on the lookout for similar exemption arguments that would avoid “narrow construction.” Secondly, the court emphasized that analysis of an exemption should include a “functional” inquiry about how the employee’s job actually functions in a particular industry. This approach may assist employers in establishing that an overtime exemption applies, especially with respect to a job classification that has traditionally been treated as exempt.•