August 13, 2012

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Recent U.S. Supreme Court Decision Favorable to Employers Has Arizona Origins

It has been a busy -- not to mention controversial -- month for the U.S. Supreme Court. Largely lost in the extensive media coverage of the Court's decisions on Arizona's SB 1070 and the federal Affordable Care Act was the Court's recent decision in Christopher v. SmithKline Beecham Corp. In Christopher, the Court affirmed rulings by the District Court in Arizona and the Ninth Circuit Court of Appeals that pharmaceutical sales representatives ("PSRs") are exempt from the overtime pay requirements of the Fair Labor Standards Act ("FLSA") as outside salespeople.

This ruling is a positive development for employers with exempt, white-collar employees on two fronts. First, a divided Court adopted a functional, rather than formalistic, interpretation of at least one white-collar exemption, the outside sales exemption. Second, the Court unanimously rejected the attempt by the Department of Labor -- the federal agency charged with enforcing and interpreting the FLSA -- to set new policy and impose new liability on employers for the first time in an amicus brief filed with a court without first providing affected employers a meaningful opportunity to participate in the rule-making process.

The FLSA requires employers to pay 1.5 times the regular rate of pay to employees who work more than forty hours in any workweek, unless the employee is exempt based upon the types of duties he or she performs. Four of the most common "white-collar" exemptions from the overtime requirement are for bona fide executive, administrative, or professional employees, including some computer employees, and outside salespeople.

Arizona PSRs Michael Christopher and Frank Buchanan sued their employer, GlaxoSmithKline, for unpaid overtime. Christopher and Buchanan, who sought to form a class action under the FLSA, claimed GlaxoSmithKline illegally misclassified them as exempt outside salesmen (as well as exempt administrative employees). Despite industry practice spanning more than seventy years, they argued that under a literal interpretation of the FLSA, they were not outside salesmen because regulations governing the pharmaceutical industry prohibited them from actually "making a sale." In fact, PSRs are prohibited from doing anything more than obtaining a nonbinding commitment from physicians in their territories to prescribe their product to a patient when the doctor believes it to be in the patient's best interest to do so.

In a 5-4 decision, the Supreme Court rejected the plaintiffs' argument, noting that "[t]here 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." A majority of the Court held that the FLSA's "emphasis on the ‘capacity' of the employee counsels in favor of 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."

While it is too soon to tell the extent of the impact of the Supreme Court's decision in situations involving workers other than outside salespeople, the decision should be helpful to employers defending FLSA misclassification lawsuits. The Supreme Court rarely takes cases involving interpretation of the FLSA, and this is the first such decision by the high court involving any of the so-called "white-collar" exemptions. The Court's adoption of a functional approach to a law passed in 1938 for the stated purpose of "protecting all covered workers from substandard wages and oppressive working hours," instead of an approach "based on technicalities," may cause the lower courts to soften the longstanding principle that the FLSA's exemptions are to be narrowly construed against employers, and applied only to those employees who are "plainly and unmistakably" within the terms and spirit of an exemption. For example, the Supreme Court noted that the median pay for PSRs nationwide exceeds $90,000 - hardly the type worker who needs protection from "substandard wages."

In more good news for employers generally, both the majority and the dissent in Christopher -- all nine justices -- rejected the Department of Labor's attempt to secure a ruling in favor of PSRs by filing unsolicited "friend of the court" briefs in the lower courts and the Supreme Court in which the DOL argued that based upon the agency's interpretation of its own regulations, the PSRs were not outside salesmen. Filing such briefs has been a common practice by the DOL (and other federal agencies), which "invites interested parties [i.e., employees] to inform it of private cases involving the misclassification of employees in contravention of the [DOL's regulations] so that it may file amicus briefs in appropriate cases to share with courts the Department's view of" its regulations. By this practice, the DOL has influenced litigation, typically in ways not favorable to employers, on a number of wage and hour issues.

The Supreme Court refused to give the DOL's position any particular weight, noting that "the DOL's interpretation of ambiguous regulations to impose potentially massive liability on [the employer] for conduct that occurred well before that interpretation was announced . . . would seriously undermine the principle that agencies should provide regulated parties ‘fair warning of the conduct [a regulation] prohibits or requires.'"

However, employers should remain cautious to ensure -- and be prepared to convince the DOL if audited -- that their exempt employees actually perform the type of duties enumerated by the FLSA that qualify for exemption. It remains the employer's burden of proof in all cases to establish that an exemption applies, and the cost of misclassifying can be staggering: unpaid overtime for up to three years, plus liquidated damages and attorneys' fees for each misclassified employee.

For help with any of your employment issues, please contact a member of Ryley Carlock & Applewhite's Labor and Employment practice group.