The Supreme Court Adds Clarity to a Much Disputed Overtime Pay Issue

In a closely watched case, Christopher v. SmithKline Beecham Corp., the U.S. Supreme Court ruled on the claim of two former pharmaceutical sales representatives, backed by the Department of Labor (DOL), who believed they were owed overtime pay. On June 18, the nine Supreme Court Justices voted 5 to 4 to reject that claim.

Here’s a look at what happened and a reminder to employers of the requirements of the Fair Labor Standards Act (FLSA).

The 1938 FLSA is one of the hallmarks of the New Deal. It laid the foundation for the federal minimum wage, overtime pay, recordkeeping, and youth employment standards affecting covered nonexempt workers in the private and public sectors. Technically, the FLSA is only applicable to employers engaged in “interstate commerce” (generally interpreted as any employer with at least $500,000 in revenue). But employers that might escape its requirements often choose to comply for practical reasons, including the risk of wrongly assuming that they are not covered.

Since 1938, the law has been amended on a regular basis, and legal disputes have arisen over, among other issues, which workers are exempt from the FLSA requirements. The general answer is executive, administrative, professional, computer and “outside sales” employees. The DOL’s overall description of FLSA exemption is presented here

In order for outside sales people to be exempt from FLSA, the DOL says the following conditions must be met:

  • The employee’s primary duty must be making sales (as defined in the FLSA), or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and
  • The employee must be customarily and regularly engaged away from the employer’s place or places of business.

Here is a link to a more detailed rundown on the DOL’s general position on exemption for outside sales people.

Meaning of “Salesperson”

The Supreme Court in Christopher v. SmithKline Beecham Corp rejected the DOL’s interpretation of the meaning of FLSA requirements as they related to the pharmaceutical sales reps. The DOL and the plaintiffs argued that since they were only employed to encourage physicians to prescribe SmithKline Beecham drugs to their patients but didn’t actually sell drugs directly to the physicians (that is, no actual transfer of title to goods had taken place), they were not truly outside salespeople — and thus were entitled to overtime pay under FLSA.

Justice Alito, writing the majority opinion, deemed the DOL’s reasoning “quite unpersuasive.” He also pointed out that the FLSA was intended to help workers at the lower end of the pay scale. “The exemption is premised on the belief that exempt employees normally earn salaries well above the minimum wage and perform the kind of work that is difficult to standardize to a particular time frame and that cannot easily spread to other works,” he wrote. The salespeople in this case, who earned in excess of $70,000, “are hardly the kind of employees that the FLSA was intended to protect,” he added.

 Public Comment Opportunity

Even if the Court had found the DOL arguments convincing, Alito faulted the Labor Department for trying to use its legal analysis of the facts in this case as the basis for imposing requirements upon all organizations covered by the FLSA. (The DOL asserted that its amicus brief at the appellate level was the equivalent of a regulatory interpretation of the law that would apply universally.) “There was no opportunity for public comment, and the interpretation that initially emerged from the DOL’s internal decision-making process proved to be untenable.”

Alito also faulted the DOL for springing its new interpretation favoring the plaintiffs’ arguments in this case “despite the [pharmaceutical] industry’s decades long practice” of treating such employees as exempt. Up until this case, the DOL had never initiated any enforcement actions against these companies. Going along with the DOL’s new interpretation “would result in precisely the kind of ‘unfair surprise’ against which this Court has long warned,” Alito wrote.

To avoid unpleasant surprises in the form of overtime pay demands from sales — or any other broad category of employees generally deemed exempt from FLSA requirements, employers need to regularly review what it might expect from the Labor Department.

In Christopher v. SmithKline Beecham Corp., Alito acknowledges the vagueness of the FLSA  in some of these areas. He summarized the Court’s conclusion by saying that understanding who is and isn’t exempt from the FLSA requirements involves focusing on employees’ functions and responsibilities, rather than their mere titles, particularly “in the context of the particular industry in which the employee works.”