Opinion analysis: No overtime for pharmaceutical “detailers” under the FLSA

On Monday, by a vote of five to four, the Court in Christopher v. SmithKlineBeecham Corp. held that pharmaceutical sales representatives, or “detailers,” fall under the “outside salesman” exemption to the Fair Labor Standards Act (FLSA) and are therefore not entitled to overtime wages. Justice Alito authored the opinion for the Court, while Justice Breyer filed a dissenting opinion, which was joined by Justices Ginsburg, Sotomayor, and Kagan.

Under the FLSA, employers must pay overtime to certain employees, but they are not required to do so for employees who work as “outside salesmen.” Congress did not define the term “outside salesman.” Instead, it left it up to the Department of Labor to define that term in its regulations. The issue facing the Court was whether detailers are “outside salesmen” as the DOL has defined that term in its regulations.

This case involved detailers who alleged that they were entitled to overtime wages when they worked over forty hours per week. The pharmaceutical sales industry is highly regulated. In particular, federal law restricts who can sell prescription drugs. Instead of actually selling the prescription drugs — because it is illegal for them to do so — the detailers call on physicians, seeking to get them to make a “nonbinding commitment” to prescribe, in appropriate cases, the drugs sold by the detailers’ employer. Each week, the petitioners spent approximately forty hours in the field calling on physicians, plus another ten to twenty hours attending events and engaging in other ancillary tasks. They were paid a base salary, plus incentives that were based on the sales of drugs their territory, but they were not paid overtime wages.

The U.S. Court of Appeals for the Ninth Circuit held that detailers were outside salesmen and thus not entitled to overtime wages. The Court granted review earlier this year; I previewed the case before oral argument in April and reported on the oral argument for this blog.

On Monday the Court affirmed the Ninth Circuit.  It began by addressing whether the DOL’s interpretation of its regulations, as set forth in its amicus briefs in this and earlier cases, was entitled to so-called Auer deference. The Court first observes that the DOL’s position has changed over time:  although it argued in the lower courts that a “sale” for purposes of the “outside salesman” exemption required a “consummated transaction,” it abandoned that test in the Supreme Court and instead took the position that an employee does not make a sale for purposes of the outside salesman exemption unless he actually transfers title.

With this change of position as a background, the Court ultimately holds that the DOL interpretation is not entitled to Auer deference. The Court emphasizes that the DOL did not provide “fair warning” to the regulated parties – namely, the pharmaceutical companies – that would be affected by its new interpretation of the DOL regulationsIn this case, the Court reasons, deferring to the DOL’s position could impose “potentially massive liability” on pharmaceutical companies, who would have to pay overtime wages to their nearly 90,000 detailers.

The Court also emphasized that for decades the DOL never initiated any enforcement actions with respect to the misclassification of detailers or otherwise suggested that the pharmaceutical industry was violating the law. Such decades-long silence, the Court suggests,  indicates that the DOL had acquiesced in the position that detailers are outside salesmen.

Turning to the DOL’s interpretation itself, the Court deems it “quite unpersuasive.” In particular, the Court continues, the DOL’s position that a “sale” requires a transfer of title “plainly lacks the hallmarks of thorough consideration.”  In particular, such a position is “flatly inconsistent” with the language of the FLSA, which allows that a sale can include a “consignment for sale” – which does not involve a transfer of title.

Having declined to give Auer deference to the DOL interpretation, the Court was then required to interpret the regulations itself to determine whether detailers fall within the outside salesman exemption.  Here, it examines the language of the FLSA, which exempts anyone employed “in the capacity of [an] outside salesman.” The statute’s emphasis on “capacity,” the Court explains, favors a “functional, rather than formal, inquiry.” As such, the definition needs to be examined in the context of the employee’s particular industry.

Moreover, the FLSA’s definition of “sale” provides that “‘[s]ale’ or ‘sell’ includes any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition” (emphasis added).   Because this definition begins with the verb “includes” instead of “means,” the examples outlined in the definition are merely “illustrative, not exhaustive.”  In the Court’s view, this interpretation is further reinforced

by the statute’s use of the broad catchall phrase “other disposition” – which in the Court’s view can include getting a physician’s “nonbinding commitment” to prescribe a certain drug, which is the most that detailers can legally do without violating federal laws governing who can sell prescription pharmaceuticals.

The Court also emphasized that detailers “bear all the external indicia of salesmen.” The petitioners are trained to close each sales call by seeking a physician’s nonbinding commitment; they work on the road, away from their employer’s home office; they work with minimal supervision; and they receive incentive compensation based on sales within a particular detailer’s territory.

Finally, the Court concludes that its interpretation comports with the FLSA’s purpose for exempting outside salesmen. Outside salesmen are typically compensated well above the minimum wage. Furthermore, their job functions do not easily lend themselves to a standard forty-hour workweek. Suddenly forcing pharmaceutical companies to pay overtime to detailers would “significantly chang[e] the nature of that position.”

In his dissenting opinion, Justice Breyer agrees with both the Court’s description of the detailers’ job functions and its conclusion that the DOL’s interpretation of its regulations is not entitled to any particular weight. However, he would reach the opposite result from the Court’s majority based on his interpretation of the FLSA and the regulations promulgated thereunder.

In the dissent’s view, a detailer’s primary duty is not making sales. A sale only occurs after a long chain of preconditions — the detailer might convince a doctor to prescribe a drug; the doctor might prescribe the drug; the patient might ask a pharmacist to fill the prescription; the pharmacist might sell the drug or might substitute a generic. The detailer merely gives the doctor information about the drugs that his employer manufactures; at no point during this process does the detailer sell anything.

The dissent would give little weight to the idea that detailers seek to convince physicians to make a “nonbinding commitment”; such a concept, Justice Breyer contends, is logically impossible, like “definitely maybe” or an “impossible solution.” Instead, he suggests, the work of detailers is more akin to that of a promoter, who engages in activities designed to stimulate sales by someone else. Moreover, a physician’s ethical obligations preclude him from prescribing the detailer’s drugs over another drug if the second drug would be more beneficial for a patient.

[Disclosure:  Tom Goldstein, the publisher of this blog, argued the case on behalf of the petitioners but was not involved in the drafting or editing of this post.]

Plain English Summary

In this case, two sales representatives of a large pharmaceutical company sued their employer, alleging that they were owed overtime wages. The pharmaceutical company argued the sales representatives were not entitled to overtime wages because they were classified as “outside salesmen,” who are exempt from the federal law that requires payment of overtime wages. The Court held that the sales representatives were outside salesmen and as such are not entitled to overtime wages.