Supreme Court Rejects Labor Dept. View On Sales-Rep Overtime

From Forbes BUSINESS | 6/18/2012 @ 11:24AM

Supreme Court Rejects Labor Dept. View On Sales-Rep Overtime

The U.S. Supreme Court today rejected the Labor Department’s interpretation of federal law and ruled that thousands of SmithKline Beecham sales representatives were exempt from overtime rules.

The decision is a rebuke to the Obama administration, which argued that some 90,000 drug reps should be covered under the 1938 law designed to protect workers from exploitation and excessive hours. In a 5-4 decision along traditional conservative/liberal lines, the court ruled that the Labor Dept. deviated from long practice by determining that sales reps who in this case earned more than $75,000 a year were equivalent to hourly workers on an assembly line.

It also could help stem the tide of wage-and-hour cases that have seen courts award overtime to such traditionally exempt employees as stockbrokers and loan officers. Plaintiff attorneys have been aggressively assembling such groups for class actions that seek hundreds of millions of dollars in back pay on behalf of thousands of employees. Drug maker Novartis paid $99 million in January to settle overtime claims brought by the company’s pharmaceutical sales representatives. The Obama administration, to court labor-union support, has every incentive to spread wage-and-hour regulations into traditionally exempt white-collar jobs.

In the decision by Justice Samuel Alito, the court noted that the Obama administration sought to change long-settled rules in 2009 to push pharmaceutical reps out of the category of “outside salesmen” exempt from the Fair Labor Standards Act overtime rules. The administration argued that drug reps didn’t fit the definition of salespeople because they don’t actually sell anything. Regulations prevent doctors from buying drugs directly from the reps; instead their job is to indirectly influence prescribing habits by offering information on the drugs (and the occasional free pizza for the staff).

The law says employees can be considered salespeople if they are involved in a sale “in any sense.” The administration argued for a stricter definition where the salesperson “actually transfers title to the property at issue.”

Congress leaves broad discretion to administrative agencies to decide how to implement the law, the court noted, but businesses also have a right to be protected against sudden and arbitrary changes.

To defer to the agency’s interpretation in this circumstance would seriously undermine the principle that agencies should provide regulated parties “fair warning of the conduct [a regulation] prohibits or requires.” Indeed, it would result in precisely the kind of “unfair surprise” against which our cases have long warned.

“Until 2009,” the court wrote, “the pharmaceutical industry had little reason to suspect that its longstanding practice of treating detailers as exempt outside salesmen transgressed” the Fair Labor Standards Act. The only interpretation is that the Labor Dept. didn’t think the law applied to pharmaceutical reps until the Obama administration reconsidered, the court said.

There are now approximately 90,000 pharmaceutical sales representatives; the nature of their work has not materially changed for decades and is well known; these employees are well paid; and like quintessential outside salesmen, they do not punch a clock and often work more than 40 hours per week. Other than acquiescence, no explanation for the DOL’s inaction is plausible.

The decision resolves a split between the Second and Ninth Circuits, with the Ninth, as usual, on the losing side of the debate.

The dissent was led by Justice Steven Breyer, who said the law doesn’t contain an exception for “outside salesmen” who don’t actually sell anything. He said the court should have followed the part of the law leaving such definitions to the Secretary of Labor to make “from time to time.