PHARMA CIRCUS: Are Pharma Sales Reps Exempt or Non-Exempt from the FLSA?

July 20, 2012  |  Employment Law, Overtime Violations

Last month the United States Supreme Court (SCOTUS) settled a contentious case between two lower courts concluding opposite verdicts and, in the process, denied the Department of Labor (DOL) a government regulatory agency’s long-sacred ‘deference’ (final word) when it comes to interpreting laws designed to protect employees from employers.

In this case SCOTUS questioned whether pharmaceutical sales representatives (PSRs, also known as drug reps or ‘detailers’) should remain exempt from overtime laws no one had disturbed in 70 years— until 2009 when the DOL filed a surprising amicus brief, essentially asking for broader consideration of legal interpretations. Several months prior to this, another appellate court had indeed granted the DOL such broad interpretation that PSRs were completely reclassified as non-exempt after more than half a century of quietly being exempt. The first ruling awarded pharma employees $99 million in damages after Novartis Pharmaceuticals was found guilty of withholding time-and-a-half pay from 9,000 newly non-exempt employees clocking 40 plus hours per work, retroactively. Pharmaceutical execs panicked at the possibility of having to pay for years of summary damages under this ruling. Not anymore.

Something else, however, was/is in question: the DOL’s regulatory methods. Since around 1950, the PSR sales model had remained unchallenged (even if rather exclusively) for the pharmaceutical industry since its unusual regulatory structure made it tricky to sort out technical vs. contextual definitions of ‘making a sale.’ PSRs do not actually sell their employer’s products to physicians; they only meet with physicians to promote and persuade, hoping the physician will be compelled to prescribe drugs from their respective employers’ arsenals as medically appropriate. Prescription drugs are then sold to individual customers who pay for the prescription, dispensed through a pharmacy. Although PSRs do not ‘make sales,’ in the usual sense of transfer for title, they compel sales by influencing physicians with their persuasive skills. Insofar as legally allowed PSRs come as close as possible to making actual sales and, therefore, fall into the exempt class.

Likewise drug industry employers had for seven decades continued the practice of classifying sales employees as exempt. The DOL never sneezed at PSRs’ exempt status, either through regulation or active enforcement, until 2009 when it filed the amicus brief resulting in Novartis’ large payout.

Last month’s SCOTUS ruling supported the latter court’s conclusion reaffirming that PSRs, in fact, should be considered ‘outside sales’ employees, exempt from overtime wage laws under the Fair Labor Standards Act—DOL’s lynchpin specifically called the FLSA Wage and Hour Act. Rejecting the DOL’s argument that ‘sales’ require a transfer of title, the Court found instead that the statute requires a more ‘functional, rather than a formal, inquiry that views an employee’s responsibilities in the context of the particular industry in which the employee works.’ The Court further stated that the DOL’s sudden challenge after so many decades constituted ‘unfair surprise.’

For the DOL unfair surprise may seem an understatement, on general principle. What’s compelling in this case is that all nine justices denied deference to the Department of Labor.

This latest decision may hold precipitous implications for several reasons: In reinforcing PSRs’ exemption a new precedent may be taking root whereby regulatory agencies —the DOL, in this instance, are not given deference to interpret or reinterpret standing laws for reasons of cultural evolution or any other reason. Second, experts are speculating whether Glaxo/DOL should raise questions over the constitutional gravitas of government regulatory agencies whose power is seemingly being preempted by federal law in recent months. Third, pro-Glaxo justices heavily emphasized the uniquely and tightly regulated pharmaceutical industry as being an anomaly. But are other just-as-tightly regulated industry sales forces next?

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