Supreme Court Rules: Pharma Reps Not Entitled to Overtime

Supreme Court Rules: Pharma Reps Not Entitled to Overtime

June 19th, 2012 // 12:00 pm @


In a widely anticipated ruling, the US Supreme Court decided in a 5-to-4 vote that pharmaceutical sales reps are not entitled to overtime pay, an issue that plagued drugmakers as they attempt to cut costs and redefine the role played by sales teams.

And in finding in favor of the industry, the court also rejected the position taken by the US Department of Labor, which has filed briefs in numerous cases supporting the notion that sales reps are entitled to overtime. The decision, however, has implications for many other industries as well, since the department has argued that the courts should defer to its interpretation of applicable statutes and rules.

Whether sales reps are entitled to overtime pay has been a closely watched and controversial topic that has involved nearly every large drugmaker. The debate has divided courts around the country for the past few years and the outcome may alter compensation for tens of thousands of industry employees who promote medicines. Now, though, the likelihood that sales reps will ever receive overtime pay appears to have been scuttled by today’s ruling.

“This opinion means that pharmaceutical sales representatives, across the board, are exempt as outside salesman. The bottom line is that all (remaining) pharmaceutical sales representative cases (regarding overtime) should, and I believe will, be dismissed,” says Richard Alfred, a labor and employment attorney who has represented various drugmakers in overtime lawsuits involving sales reps. “All of these cases are now at an end… It’s a very broad ruling on that point.”

The key issue in the litigation has been whether sales reps are exempt from overtime provisions of the Fair Labor Standards Act. The FLSA overtime compensation requirement does not apply to employees who work as outside salespeople, but the law does require employers to pay overtime for hours worked beyond 40 hours a week, unless a FLSA exemption applies. And there are two exemptions.

One is the outside sales exemption: if an employee’s primary duty is to obtain orders or contracts (as defined by the statute) and regularly does so away from the employer’s place of business. Reps argue a direct sale doesn’t occur because drugs are actually purchased by patients and hospitals, which buy meds from wholesalers. They also insist they follow a script. Drugmakers argue reps are, indeed, outside salespeople who close sales because the primary customer is a physician.

The Supreme Court, however, ruled that the “end goal was not merely to make physicians aware of the medically appropriate uses of a particular drug. Rather, it was to convince physicians actually to prescribe the drug in appropriate cases.”

Over the past few years, the cases have gone both ways, although earlier this year, Novartis paid $99 million to settle one such lawsuit, the first time that a drugmaker took this step (see here). Meanwhile, drugmakers have been laying off thousands of sales reps as they try to cut costs and alter their business models.

The Supreme Court reviewed a case involving two GlaxoSmithKline reps Michael Christopher and Frank Buchanan, whose bid for overtime pay was denied last year by a federal appeals court (here is their brief filed with the Supreme Court). Significantly, Glaxo last year began overhauling its system for evaluating and paying reps, a shift that some interpreted as a partial response to the litigation (back story).

For its part, Glaxo argued that sales reps are “selling specific products to specific doctors, not promoting sales by pharmacists to patients or stimulating Glaxo’s sales generally,” in its brief to the Supreme Court (read here). “There is no ‘bright line’ between salesmen and promoters. Promotional work that is actually performed incidental to and in conjunction with an employee’s own outside sales or solicitations is exempt.”

The court agreed. “Our holding also comports with the apparent purpose of the FLSA’s exemption for outside salesmen. The exemption is premised on the belief that exempt employees ‘typically earned salaries well above the minimum wage’ and enjoyed other benefits that ‘set them apart from the nonexempt workers entitled to overtime pay.’ It was also thought that exempt employees performed a kind of work that ‘was difficult to standardize to any time frame and could not be easily spread to other workers after 40 hours in a week, making compliance with the overtime provisions difficult and generally precluding the potential job expansion intended by the FLSA’s timeand-a-half overtime premium’ ” (here is the Supreme Court ruling).

The two Glaxo reps, “each of whom earned an average of more than $70,000 per year and spent between 10 and 20 hours outside normal business hours each week performing work related to his assigned portfolio of drugs in his assigned sales territory, are hardly the kind of employees that the FLSA was intended to protect. And it would be challenging, to say the least, for pharmaceutical companies to compensate detailers for overtime going forward without significantly
changing the nature of that position.”

“We are very disappointed by the court’s ruling especially since it was 5-4 along party lines,” says Eric Kingsley, one of the attorneys who represented the Glaxo sales reps. “It seems the opinion focused on the potential exposure to the industry and glossed over the requirements of a sale.”

Meanwhile, the court slapped down the contention by the US Department of Labor that reps should be awarded overtime. The department had filed amicus curiae – or friend of the court – briefs in cases around the country. In the first such brief filed two years ago in support of the Glaxo reps, the DOL argued that, under its reuglations, “the reps do not meet the requirements for the outside sales exemption. The reps do not sell or take orders for…GlaxoSmithKline’s drug. Rather, they provide information to target physicians about GSK’s drugs with the goal of persuading the physicians to prescribe those drugs to their patients. The actual sale of drugs takes place between GSK and pharmacies.

“Although the reps’ duties bear some of the indicia of sales – they use methods of persuasion similar to those of salespersons, they receive some of their compensation in the form of incentive compensation, and their promotion work affects GSK’s actual drug sales – the fact that the reps do not actually ‘make sales’ conclusively demonstrates that the position is not that of an outside salesperson consistent with the Department’s legislative rules.”

But the court disagreed. In various court filings, the department has sided with reps and argued that the courts should defer to its interpretation of applicable statutes and rules. The court, however, ruled that “deference is undoubtedly inappropriate, for example, when the agency’s interpretation is ‘plainly erroneous or inconsistent with the regulation.’ And deference is likewise unwarranted when there is reason to suspect that the agency’s interpretation ‘does not reflectthe agency’s fair and considered judgment on the matter in question.’ Moreover, in his dissent, Justice Stephen Breyer agreed with the majority that the department did not warrant deference.

In short, the decision means that the Department of Labor should give notice of pending rules and regulations, rather than attempt to pursue enforcement through court briefs (read more here). “It’s devastating to the Department of Labor’s regulation by amicus program,” says Alfred. “It is, in fact, a rebuke…The department should file noties and gives parties an opoproutnity to comment on whatever they’re proposing.”

“This shows that both the conservatives and the liberals on the Court will not rotely invoke deference principles and simply defer to an agency opinion in an effort to avoid reaching the underlying merits of a given dispute and thereby make things easier on themselves,” says Arnie Friede, a former FDA associate chief counsel and a former senior corporate counsel at Pfizer.

“On the contrary, it shows that the Court will carefully evaluate deference claims against the foundational principles that animate the deference doctrine and will decline, in appropriate cases, to defer to the judgment of the administrative agency, particularly where the agency’s determination is announced in an amicus brief filed ‘late in the day’ after many years of apparent acquiescence in industry’s approach to the problem.”

[One point worth noting is that the Supreme Court did not adddress the administrative exemption, which relieves employers from paying overtime to any employee who is employed in a bona fide executive, administrative, or professional capacity – and to employees earning over $455 a week whose primary duty is to perform office or non-manual work involving managerial or general business matters. A primary duty includes exercising discretion and independent judgment. Last month, a federal appeals court ruled in favor of Eli Lilly and Abbott Laboratories on this exemption].

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