In Affirming Pharmaceutical Reps’ Exempt Status, U.S. Supreme Court Refuses to Defer to DOL

On June 18, 2012, the United States Supreme Court ruled in a 5-4 decision that pharmaceutical sales representatives (PSRs) are “outside sales” employees exempt from the overtime pay requirements of the federal Fair Labor Standards Act (FLSA). Crucially, all nine of the justices refused to give deference to the United States Department of Labor’s (DOL) interpretation of the outside sales regulations. The decision represents a big win for employers in the pharmaceutical industry and also a blow to the DOL’s attempt to regulate through litigation.

Generally, the FLSA requires employers to pay their employees overtime (one-and-a-half times the employees’ “regular rate”) for hours worked in excess of 40 hours per week. But the FLSA exempts certain positions, including executives, administrative employees and outside salespersons, from this requirement.

The Court’s decision in Christopher v. SmithKline Beecham, 567 U.S. ___ (2012) (slip op.), addressed whether PSRs were exempt outside salespersons. The plaintiffs, who sued on behalf of a class of roughly 9,000 PSRs, alleged that because federal drug laws prevented them from selling prescription drugs to physicians or obtaining binding commitments from physicians to sell those drugs, they couldn’t be considered “salespersons.” Therefore, the plaintiffs contended, they were non-exempt employees who were entitled to overtime pay for all hours worked over 40 in a week.

The Christopher case involved more than just the question of whether the PSRs were exempt; the DOL’s regulatory methods were also at issue. For decades, the PSR sales model had remained unchanged, as had employers’ practice of classifying PSRs as exempt employees. The DOL, however, had not challenged PSRs’ exempt status, either through regulation or enforcement action, until 2009, when it filed an amicus brief in a lawsuit similar to Christopher.

Courts will typically give the DOL deference when it interprets its own regulations, such as the outside sales regulations. But the Christopher Court declined to do so because the DOL reversed its long-standing position on PSRs’ exempt status, and did it in the context of litigation instead of notice-and-comment rulemaking. Moreover, the Christopher Court criticized the DOL for changing the rationale for its position in its filings with the Supreme Court.

The case is particularly significant because it puts the brakes on the DOL’s strategy of regulation through litigation. This strategy is not new, but the Supreme Court’s rebuke of it in Christopher is notable given the DOL’s recent attempts to implement a variety of labor regulations without going through the traditional notice-and-comment process. In sum, resistance from both the courts and the public may slow an aggressive DOL’s regulatory agenda.