SCOTUS Overrules 2nd Cir on Pharmaceutical Sales Rep Overtime Pay - U.S. Second Circuit
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SCOTUS Overrules 2nd Cir on Pharmaceutical Sales Rep Overtime Pay

Monday, the Supreme Court overturned the Second Circuit Court of Appeals on the issue of overtime pay for pharmaceutical sales representatives (PSRs).

In what has become an increasingly rare occurrence in cases involving circuit splits, the Court sided with the Ninth Circuit, finding that a PSR is an “outside salesperson,” exempt from the Fair Labor Standards Act’s overtime pay requirements.

The FLSA and Department of Labor regulations generally require that employers pay 1.5 times an employee's regular hourly rate for each hour worked in excess of 40 hours per week, unless the employee qualifies for an exemption from the overtime rules. Outside salespersons -- employees whose primary job duty is to sell products away from their employers' offices -- are exempt from the FLSA overtime pay requirement.

The Department of Labor requires the following criteria to be met to prove an outside salesperson exemption:

  • The employee's primary duty must be making sales (as defined in the FLSA), or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and
  • The employee must be customarily and regularly engaged away from the employer's place or places of business.

In its 2010 In re Novartis Wage & Hour Litigation decision, the Second Circuit ruled that PSRs should get overtime wages. The Ninth Circuit, by contrast, ruled in its 2011 Christopher v. SmithKline Beecham decision that PSRs are exempt from overtime pay as outside salespeople.

The case turned on the interpretation of "making sales." Instead of selling prescriptions, PSRs secure non-binding commitments from doctors to prescribe drugs as medically appropriate. Though the agreements are unenforceable, pharmaceutical manufacturers value physicians' commitments enough to reward a PSR with increased commissions when a physician increases his or her use or prescription of the promoted drug.

That, according to the Supreme Court, was enough for a PSR to qualify as an outside salesperson. The generous compensation that PSRs receive didn't help their case.

Justice Samuel Alito, writing for the majority, noted, "Petitioners -- each of whom earned an average of more than $70,000 per year ... are hardly the kind of employees that the FLSA was intended to protect."

The Supreme Court's decision will affect approximately 90,000 PSRs in the U.S.

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