Tuesday, June 19, 2012

Supreme Court rules that pharmaceutical sales reps are "outside salesmen" under the law

In Christopher v. SmithKline Beecham Corp. the US Supreme Court has ruled (in a 5-4 decision) that certain pharmaceutical sales representatives are exempt from the overtime-pay requirement of the Fair Labor Standards Act (FLSA).  In this case, the court ruled that sales reps whose primary duty is to obtain nonbinding commitments from physicians to prescribe certain prescription drugs qualified as "outside salesmen" and are thus outside the FLSA minimum wage and maximum hour requirements.  

Outside salesmen are among the employees categorized as "exempt" in 29 U.S.C.A. 213(a)(1) as "any employee employed in a bona fide executive, administrative, or professional capacity ... or in the capacity of outside salesman (as such terms are defined and delimited from time to time by regulations of the Secretary of Labor).... " 

The law defines an "outside salesman" "as any employee: (1) Whose primary duty is: (i) making sales within the meaning of section 3(k) of the Act; or (ii) 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 (2) Who is primarily and regularly engaged away from the employer's place or places of business in performing such primary duty." 

Under 29 C.F.R. 541.501(b), "sales" include "the transfer of title to tangible property, and in certain cases, of tangible and valuable evidences of intangible property."  While there was no transfer of title in the Christopher v. SmithKline Beecham Corp. case, the pharmaceutical sales representatives that brought the underlying action were responsible for calling on physicians in their sales territory to discuss the features, benefits, and risks of  SmithKline Beecham drugs.  They were not selling the drugs in the traditional sense of the word, because their primary objective was to obtain a nonbinding commitment from a physician to prescribe the drugs if and when appropriate.   Working about 40 hours per week calling on physicians, and an additional 10 to 20 hours per week on other activities, the sales reps were paid a base salary plus incentive pay.  However, they were not paid time-and-a-half wages when they worked in excess of 40 hours per week, and brought the underlying lawsuit alleging that SmithKline Beecham had violated the FLSA's overtime laws.  

What does this mean for you?  If you employ outside sales representatives, you should ensure that you are complying with both state and federal laws, especially if your sales representatives cover a territory that covers multiple states.  The law changes frequently, and it is a good idea to schedule annual review of employee and sales representative contracts to make sure that they are up-to-date and protect you, the employer, from as much risk as possible.

This is intended as a legal update, not legal advice.  Every situation is different, and this case may not apply to your situation, nor is any attorney-client relationship formed by your use of the information contained herein.  For tailored legal advice, consult a licensed attorney. I offer free thirty minute legal consultations to employers in San Luis Obispo, Santa Barbara and Ventura counties, and am always happy to help business owners minimize the risk of employee lawsuits.

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