In a 5-4 decision, the Supreme Court of the United States of America dealt a blow to pharmaceutical salesmen when it ruled that the salesmen were not entitled to overtime wages under the Fair Labor Standards Act (FLSA) because they fell under the “outside salesman” exemption.
In Christopher v Smithkline Beecham Corp., two salesmen who worked for a pharmaceutical company sued their employer for back overtime wages. The employees worked a total of 50-60 hours per week, and usually spent between 10 and 20 hours a week on various other work related activities such as attending events, reviewing product materials, returning phone calls and emails, among other things. The employees never punched a clock and were well compensated.
The employer argued that the employees were not entitled to overtime pay because the employers fell under the “outside salesman” exemption of the FLSA. Generally, the FLSA requires employers to pay employees time and a half for every hour worked over 40 hours in a week. However, employees who are considered “outside salesmen” need not be paid for overtime.
The employees argued that they were not “outside salesmen” because they never actually sold any products. Rather, the employees would discuss drugs with doctors and receive non-binding commitments from the doctors to prescribe their products.
When drafting the FLSA, Congress did not define the term “outside salesman.” Instead, Congress allowed the Department of Labor to define the term in its regulations. The Court began by noting that the Department of Labor defined an outside salesman “as an employee whose primary duty is making sales.”
Next the Court had to determine whether pharmaceutical employees made “sales” under the regulations. The FLSA states that a “[s]ale’ . . . includes any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.” The Court ruled that the nonbinding commitments received from doctors, while not a transfer of title, constituted an “other disposition” of the products.
The Court also noted that the employees acted exactly as other salesmen. The employees were trained to seek a doctor’s nonbinding commitment on each sales call; the employees worked on the road, away from their employer’s home office; the employees worked with little supervision; and the employees received commissions determined by the sales within a particular employee’s sales territory.
The impact of this ruling appears to be narrow because the ruling applies to the salesmen in one particular, highly regulated industry. It is important to keep in mind that the Department of Labor will still likely a hard line approach with regards to other industries such as healthcare and financial services. Employers should be certain to review their compensation policies and make sure they comply with the FLSA’s regulations for their sales people.
