Labor: Supreme Court rejects the DOL’s outside sales exemption interpretation

What Christopher v. SmithKline Beecham Corp means for employers

Pharmaceutical companies can breathe a (big) sigh of relief. On June 18, the Supreme Court ruled, in Christopher v. SmithKline Beecham Corp., that pharmaceutical sales representatives (also know as “detailers” and the subject of a previous article) satisfy the Fair Labor Standards Act’s (FLSA) outside sales exemption.

As important as this decision is to the pharmaceutical industry, it also is of great importance to employers generally, for the way the court disposed of the Department of Labor’s (DOL) arguments. The court essentially admonished the DOL for its recent practice of changing its regulatory interpretations via amicus briefs. The court also rejected the DOL’s new, and very technical, interpretation of the definition of a “sale” under the FLSA. Instead, the court took a practical approach to interpreting “sale” and in evaluating whether detailers constitute the type of employees the FLSA was intended to protect.

The court began its analysis of the DOL’s position by stating that “the DOL’s ultimate conclusion that detailers are not exempt has remained unchanged since 2009, [but] the same cannot be said of its reasoning.” In its amicus brief, the DOL argued that detailers did not conduct sales because they did not “consummate transaction[s] directly involving the [detailer.]” At oral argument, however, the DOL abandoned this reasoning and instead argued that detailers did not make “sales” because they did not “actually transfer title to the property at issue.”

The court declined to defer to either of these interpretations because the DOL did not provide employers any notice (through the rulemaking process) of the change in its interpretations, and allowing the DOL to change its regulatory interpretations via amicus briefs would result in an “unfair surprise” to employers.

Further, the pharmaceutical industry treated detailers as exempt outside sales employees for 70 years without any action by the DOL. “Other than acquiescence, no explanation for the DOL’s inaction is plausible,” the court wrote.

As for the DOL’s technical interpretation of “sale” (i.e., requiring an actual transfer of title), the court held that this new interpretation was “flatly inconsistent with the FLSA.” The court referred to the fact that the FLSA defines “sale” to include a “consignment for sale,” which “does not involve the transfer of title.”

The DOL also relied on 29 C.F.R. section 541.501 (the sales regulation), which defines “sale” to “include the transfer of title ” The court rejected this argument too, holding instead that the sales regulation states “only that transactions involving a transfer of title are included within the term ‘sale,’” not “that a sale must include a transfer of title.”

After rejecting the DOL’s interpretations, the court went directly to the statutory and regulatory language. First, the court focused on the fact that the outside sales exemption applies to any employee working “in the capacity of [an] outside salesman.” The court took the reference to “capacity” to mean that Congress “favor[ed] a functional, rather than a formal, inquiry, one that views an employee’s responsibilities in the context of the particular industry in which the employee works.”

The court then focused on the various ways the FLSA and the DOL’s regulations define “sale” or “sell.” Under the FLSA, “sale’ or ‘sell’ includes any sale, exchange, contract to sell, consignment for sale, shipment for sale or other disposition.” The court pointed out that the term is defined to include certain transactions and not to mean any transactions in particular. Thus, the list of transactions used in the definition is “illustrative, not exhaustive.”

Further, the definition modifies the listed transactions with the word “any,” which in this context, means “one or some indiscriminately of whatever kind.” This expansive interpretation is justified because the definition includes “the unmodified word ‘sale’ and transactions that might not be considered sales in a technical sense, including exchanges in consignments for sale.” Finally, the court interpreted the FLSA’s use of “other disposition” as a “catchall phrase,” which the court defined as “including those arrangements that are tantamount, in a particular industry, to a paradigmatic sale of a commodity.”

The court nicely summarizes the takeaway from this decision with its straightforward and common sense analysis of the duties of a detailer and the purposes of the FLSA. The court looked at the everyday tasks completed by the detailers—their sales calls, ultimate goal of getting nonbinding commitments from physicians to prescribe their employer’s products and after-hours schmoozing, which are all tasks typically performed by outside sales employees in other industries.

The court also noted that the outside sales “exemption is premised on the belief that exempt employees ‘typically earn salaries well above the minimum wage’ and enjoyed benefits that ‘set them apart from the nonexempt workers entitled to overtime pay.’” The compensation and benefits provided to detailers are no different. Under these circumstances, the court concluded that detailers “are hardly the kind of employee that the FLSA was intended to protect.”

Although it is unlikely that the current DOL will stop trying to change its own regulatory interpretations via amicus briefs or that its interpretations of other exemptions will become more straightforward, employers can seek comfort in the court’s explicit rejection of the DOL’s current practices. More importantly, this case can serve as ammunition to defeat similar DOL attacks going forward.

Contributing Author

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Christine McLaughlin

Christine Liu McLaughlin is a shareholder in Godfrey & Kahn, S.C.'s Labor & Employment Law Practice Group in the Milwaukee office and is chair of the firm's...

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Contributing Author

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Rufino Gaytán

Rufino Gaytán is an associate in Godfrey & Kahn, S.C.'s Labor & Employment Law Practice Group in the Milwaukee office. Rufino assists private and public employers in addressing...

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