June 24, 2012 United States Supreme Court Holds that Pharmaceutical Sales Representatives Qualify for the FLSA’s “Outside Sales” Exemption

Last week, the United States Supreme Court issued its decision in Christopher v. SmithKline Beecham Corp., 567 U.S. ___ (2012), holding that prescription drug sales representatives qualify for the “outside sales” exemption under the federal Fair Labor Standards Act (“FLSA”).

Discussion

The plaintiffs in Christopher were pharmaceutical sales representatives (“PSRs”) who worked for SmithKline Beecham.  Their job involved visiting doctors, educating them about SmithKline’s prescription drugs, and encouraging them to prescribe SmithKline’s drugs to patients in the appropriate circumstances.  The plaintiffs claimed that they were improperly classified as exempt, and thus were entitled to overtime pay.  Plaintiffs argued that the “outside sales” exemption in the FLSA did not apply because the PSRs did not make any actual sales to the doctors. 

A five-justice majority found the plaintiffs’ argument unpersuasive, affirming a similar ruling from the Ninth Circuit.  The United States Department of Labor (“DOL”) submitted an amicus brief in which it asserted (for the first time) that a “sale” under the FLSA required a transfer of title of the item being sold.  The Court declined to follow the DOL’s new interpretation.  Instead, the Court found the FLSA’s definition of “sale” to be broad and not exhaustive, including any arrangements that equate, within an industry, to a “sale” of goods.  Because the direct sales of prescription drugs are not permitted, the Court concluded that educating and encouraging doctors to prescribe certain drugs basically equates to selling the drugs directly. 

The Court also found that PSRs had all the “outside indicia” of a traditional sales person.  They worked non-traditional hours outside of the office with minimal supervision, and were rewarded with incentive compensation.  Further, the Court concluded that it would be anomalous for the PSRs to be non-exempt, while sales representatives who sell physician-administered drugs (who “function identically” to PSRs) are exempt simply because doctors order these drugs directly.  Finally, the Court noted that PSRs enjoyed salaries far above the minimum wage, and were “hardly the kind of employees that the FLSA was intended to protect.” 

What This Means

While the Court conclusively held that PSRs are exempt under the FLSA, the impact on California employers is less clear.  California’s wage and hour laws are similar, but not identical, to the FLSA.  California’s version of the “outside sales” exemption covers employees who engage in “selling” activity, but that term has not been specifically defined.  However, California courts, as well as the California Labor Commissioner, have recognized that sales activity does not exclusively mean engaging in a transaction; it can also include activities necessary to and part of making such sales, such as driving to meet a customer. 

The Christopher decision appears to be consistent with California’s approach to the outside sales exemption.  Whether Christopher will be embraced by California courts, however, remains to be seen.  In the meantime, California employers applying the “outside sales” exemption should ensure that the employee is engaging in sales activities outside of the office – a requirement under California law that is unaffected by the Christopher decision.  Finally, it is important to be mindful of California’s quantitative approach, which requires that an employee spend at least 50 percent of working hours engaged in outside sales activities to qualify for the exemption.

This E-Update was authored by Fred Plevin and Matthew Jedreski.  For more information, or questions, please contact Mr. Plevin, Mr. Jedreski, or any Paul, Plevin attorney at (619) 237-5200.