Supreme Court Rules That Pharmaceutical Sales Reps are Exempt Outside Salespersons

Today the United States Supreme Court issued its decision in Christopher v. SmithKline Beecham, holding that pharmaceutical sales representatives are exempt outside salespersons under the federal Fair Labor Standards Act (FLSA).  This is a very favorable decision for the pharmaceutical sales industry, which has been plagued with class action lawsuits seeking overtime compensation for these typically highly paid sales representatives.

To qualify as an exempt outside salesperson under the FLSA, an employee’s primary duty must be sales and he must customarily and regularly work away from the employer’s premises in performing those sales duties.  In this case, the issue in dispute was whether the employees’ duties qualified as “sales” duties because the pharmaceutical reps’ work is not sales work in the common sense of the term--that is, the reps do not actually sell products in exchange for money.  Instead, the reps’ job is to meet with physicians with the goal of promoting certain drugs and encouraging physicians to write prescriptions for those drugs.  The plaintiffs in the case, as well as the federal Department of Labor, argued that this activity is not “sales” and that for it to constitute sales, there would have to be a consummated transaction involving a transfer of title to property that is the subject of the transaction.   A federal district court rejected this narrow interpretation of “sales,” and held that the reps’ work was sales and that they qualified for the outside sales exemption.  The Ninth Circuit agreed.

Not to be deterred, the plaintiffs sought further review by the Supreme Court, which has now agreed with the lower courts that the reps’ work is sales and that they are exempt outside salespersons, not entitled to overtime compensation under the FLSA.  In its ruling, the Court flatly rejected DOL’s narrow interpretation of the term “sales” as requiring an actual transfer of title to property, holding that the DOL’s interpretation was “unpersuasive” and not entitled to deference.  The Court practically reasoned that the term “sales” has to be viewed in the context of the industry involved and that in the pharmaceutical sales industry, securing a physician’s nonbinding commitment to prescribe certain drugs is the most a sales rep can do to “sell” the drug in the unique context of the highly regulated pharmaceutical sales industry.

While the Supreme Court’s ruling is favorable for the pharmaceutical sales industry and provides a favorable interpretation of the meaning of “sales” that may carry over into other industries, California employers are cautiously reminded that for their sales employees to qualify as outside salespersons, they must meet the requirements of California’s outside sales exemption test and not just the FLSA test.  California’s test requires the employees to spend more than 50% of their work time away from the employer’s premises engaged in sales duties.

The full opinion in Christopher v. SmithKline Beecham is here.