The Law: Overtime pay? Not so fast

The devil can be in the details, and this certainly is true when it comes to overtime pay.

Most employers know that the Fair Labor Standards Act (FLSA) provides that certain types of employees - exempt employees - don't need to be paid overtime.

One of these exemptions is for outside sales.

Under the FLSA, an outside sales employee must have a primary duty of making sales or obtaining orders, and spend most of their time away from the employer's offices. Most outside sales employees have a mix of base salary and commission compensation.

Of course, merely because an employer calls an employee “exempt” and pays them a salary does not necessarily make it so under the FLSA. Because of the often grueling travel and hours, many outside sales employees believe they are entitled to overtime and have sued employers claiming that they have been misclassified.

In June 2012, the U.S. Supreme Court issued an eagerly anticipated opinion in Christopher v. SmithKline Beecham Corp. The court held that pharmaceutical sales representatives (PSRs) employed by SmithKline (now GlaxoSmithKline PLC) were primarily engaged in “making sales” and therefore exempt employees not entitled to overtime.

One commentator proclaimed the decision to be “one small step for employers and one giant leap for the pharmaceutical industry,” as a victory for the employees would have cost the industry billions in unpaid wages, attorneys' fees and costs. (Swiss drugmaker Novartis in January 2012 agreed to pay $99 million to settle a similar overtime lawsuit, after the federal court in New York ruled the sales representatives were not exempt - a holding that the Supreme Court has now rejected.)

In Christopher v. SmithKline Beecham, the PSRs and the U.S. Department of Labor argued that rather than actually making “sales,” PSRs merely engage in “detailing” - that is, they “provide medical professionals who prescribe pharmaceuticals with the ‘details' of pharmaceutical products, seeking to educate the prescribers with the ultimate goal of influencing their prescribing decisions.”

They further argued that the applicable regulations expressly define an “outside salesman” as an “employee with the ‘primary duty' of ‘making sales,'” and that the regulations distinguish between employees who sell something themselves and those who “promote” products to stimulate sales made by someone else. The PSRs claimed they fit cleanly into the category of those who undertake “promotional” work incidental to sales and, as such, do not primarily engage in sales.

The employer, however, argued that the primary duty of its PSRs was indeed sales. The company contended PSRs engaged in “selling” to physicians - the real “customers” who are the only people authorized under federal law to write prescriptions and provide drugs to the end user. They argued PSRs' primary duty is to sell by encouraging physicians to write prescriptions that, in turn, results in a sale.

The court agreed with the employer and found that the PSRs were primarily engaged in the duty of selling, and thus were properly classified as exempt employees. The court said that it would look at the employee's responsibilities in the context of the particular industry in which the employee works.

The court did not accept the difference between “selling” and “promoting” offered by the employees and the Labor Department. It also found that the PSRs had all the external indicia of salespersons:

•  They were hired for their sales experience.
•  They were trained to close each sales call by obtaining a physician's maximum commitment.
•  They work away from their office with minimal supervision.
•  They were rewarded for their efforts with incentive compensation.

The court said the FLSA was intended to exempt employees who typically earn salaries well above the minimum wage. Here, the PSRs earned more than $70,000 per year and spent 10 to 20 hours outside normal business hours performing sales related work, which the court found “hardly the kind of employees the FLSA was intended to protect.”

Finally, the court found that the Labor Department's newest position on outside salesperson - after nearly 70 years of acquiescence to the industry's treatment of PSRs as exempt from the FLSA - would amount to an “unfair surprise” to the pharmaceutical industry.

An employer will likely win any FLSA litigation if its outside sales people are well paid and perform their work with minimal supervision and great discretion. An occasional “ride along” with a manager every three months is likely not going to destroy the exemption.

The Christopher v. SmithKline Beecham decision creates the first definitive ruling rejecting the oft-cited notion that the FLSA exemption should be “narrowly construed” against the employer.

While it does not create a per se rule for all outside salespersons, the court approved a flexible interpretation of what it means to sell - and signaled that the FLSA exemptions should be interpreted practically based on the particular industry and not based on technicalities.