Court Concludes That Pharmaceutical Sales Reps Are FLSA Exempt

Friday, September 28, 2012

The U.S. Supreme Court recently found that pharmaceutical sales representatives are in fact "outside salesmen" for the purposes of the Federal Fair Labor Standards Act (FLSA) and are therefore, exempt from its overtime provisions. While this decision certainly brings relief to SmithKline Beecham and other pharmaceutical manufacturers, it is also important to note that the decision struck a blow to the Department of Labor (DOL). The DOL had argued that “[a]n employee does not make a ‘sale’ . . . unless he actually transfers title to the property at issue.” In the case of pharmaceutical sales, “property title” transfer does not occur between the pharmaceutical sales representative and the physician or for that matter between pharmaceutical sales representative and the end consumer. Had the Court “deferred” to the DOL interpretation, the FLSA status of pharmaceutical sales representatives might have come out different. Referring to pharmaceutical sales representatives, whose average salary was $70,000, the Court remarked, “hardly the kind of employees that the FLSA was intended to protect.”  See Christopher v. SmithKline Beecham Corp. (No. 11-204, U.S. June 18, 2012).

While such decisions by the Supreme Court may seem removed and distant from your specific business, assuming that you are not pharmaceutical manufacturer or a pharmaceutical sales representative. Nevertheless, if your business involves “outside” sales the decision does bring a degree of clarity to what a “sale” is and is not. Had the Court agreed with the sales representatives who brought the action and deferred to DOL’s argument of title transfer, many organizations would be looking at significant labor cost increases. Although the Court sided with the employer, that action does not lessen the broad scope and depth of Federal Fair Labor Standards Act on the workplace. Misclassification of workers as exempt when in fact they are non-exempt is still an ongoing and troublesome aspect of human resource management.

In general, employees are either exempt from FLSA standards or they are “non-exempt”. The three most common exemptions to FLSA overtime and minimum wage standards are summarized below:

Executive Exemption:

• Employee must be compensated on salary basis at a rate not less than $455/week

• Employee’s duty must be managing the enterprise, department or subdivision

• Employee must direct the work of oyhers

• Employee must have the authority to hire or fire other employees

Administrative Exemptions:

• Employee must be compensated on salary basis at a rate not less than $455/week
• Employee’s primary duty must be the performance of office work

• Employee’s primary duty includes the exercise of discretion and judgment

Professional Exemption:

• Employee must be compensated on salary basis at a rate not less than $455/week

• Employee’s primary duty must require advanced knowledge

When misclassified workers are identify, better if by the organization, rather the DOL, it would be prudent to take actions to correct the situation as soon as possible. The financial risk is significant; base wages, penalties, fines, legal cost, lost productivity, distraction, and decline in worker morale are equally significant.