Employers sometimes find themselves on the short end of the Department of Labor's wage and hour decisions, but in a recent case, the U.S. Supreme Court flipped the tables when the court overruled the DOL's interpretation of its own rules. The justices found that pharmaceutical sales representatives employed by SmithKline Beecham Corp. are employed as outside salespeople and therefore not entitled to overtime pay.
The DOL has authority to issue rules for enforcing the Fair Labor Standards Act. Courts typically defer to these rules and the DOL's authority to enforce them when considering cases pertinent to the Act. In part, the FLSA requires non-exempt employees to be paid
time-and-one-half for time worked more than 40 hours in the work week. However, not all employees are entitled to overtime pay.
The FLSA allows some jobs to be exempted including outside sales people and employees who work in administrative, executive or professional positions. Employers often prefer their employees be exempt. This avoids having to pay overtime and allows for scheduling flexibility. However, exemption decisions aren't based on preference, but rather on whether the job meets at least one of the various FLSA exemption tests.
Decisions by employers to exempt workers might be challenged by the DOL. The agency assesses job duties and other facts and applies their own interpretation to the tests. When the DOL disagrees with the employer's exemption determination, the DOL can levy back pay awards and penalties.
That's what happened to SmithKline Beecham Corp. The issue eventually landed before the Supreme Court to decide whether pharmaceutical sales representatives are exempt or non-exempt.
SmithKline Beecham's decision to exempt its sales people was made in good faith, based on a long-standing industry practice that pharmaceutical sales people are exempt. Importantly, this industry practice went on for years with acquiescence from the DOL. The DOL recently reversed this historical practice and understanding when it determined that SmithKline Beecham pharmaceutical representatives were entitled to overtime for the 10 to 20 hours they worked during their scheduled 40-hour work week.
The DOL's shift was based on the premise that the company representatives didn't actually make "sales," but rather provided information to physicians about the pharmaceutical products in hopes of influencing physicians to write prescriptions for their products.
In a 5-4 majority decision, the Supreme Court affirmed SmithKline Beecham's position that its pharmaceutical sales representatives are outside sales employees, and therefore exempt from overtime. While disagreeing with the DOL's interpretation of the term "sale," the court noted the SmithKline Beecham sales representatives were hired for their sales experience and were trained to close sales calls by obtaining a maximum (albeit non-binding) commitment from their customer. The sales representatives were rewarded with incentive compensation, and as required by the outside sales exemption test, they worked away from the office with minimal supervision.
The court further clarified that "each of (the pharmaceutical sales reps) 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 -- (which) are hardly the kind of employees that the FLSA was intended to protect."
Properly applying the exemption tests is a difficult challenge for employers and HR professionals alike. The tests are subjective and open to interpretation. Guidance from the DOL often is conflicting as was evidenced by this case.
Although the DOL holds employers accountable for sufficiently considering and properly justifying their exemption decisions, the Supreme Court described the DOL's interpretation of the outside sales exemption as "quite unpersuasive" and stated that their determination "plainly lacks the hallmarks of thorough consideration."
The Supreme Court has clarified the outside sales exemption as applied to pharmaceutical sales representatives, and its decision seems to have broadened what constitutes a "sale." This should give important guidance when determining the exemption status for sales jobs in industries other than pharmaceuticals.
It also is significant that the Supreme Court didn't give deference to the DOL's interpretation of its own rules, which might encourage employers to challenge other rulings by the DOL.
Regardless, the exemption rules still carry weight, and it's important that employers carefully consider whether jobs are defensibly exempt. Exemption decisions can't be made lightly as illustrated by the SmithKline Beecham case. They should be made on a case-by-case basis, with due consideration given to all available facts, and guidance given through the FLSA, DOL regulations and courts.
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