Wage & Hour Counsel : Wage & Hour Lawyer & Attorney : Littler Mendelson Law Firm : Employment Law, Labor Relations

During Monday’s hour-long oral argument, the justices engaged in lively questioning over the application of the exemption in the pharmaceutical industry. One important point of discussion revolved around the PSRs’ ability to obtain assurances from doctors to prescribe their drugs. Attorney Thomas Goldstein represented the PSRs and argued that because PSRs do not receive binding or written commitments from physicians to prescribe medications, they do not engage in sales under Section 3(k) of the FLSA. While Chief Justice Roberts agreed that physicians merely tell the PSRs that they will consider using their products in relevant medical situations, Justice Scalia raised the point that the particularities of selling in the pharmaceutical industry should be taken into account, noting that “these people look like salesmen to me.” Respondent SmithKlineBeecham’s counsel, former Solicitor General Paul Clement, argued that the PSRs in fact are engaged in “sales” because they obtain binding commitments from doctors and that these commitments can be oral. Mr. Clement further argued that extending the DOL’s position to the industry as a whole would end in an illogical result as pharmaceutical sales representatives selling medical devices to doctors would be exempt, but representatives selling drugs would not.

Faced with massive and unexpected liability – estimated by many to be in the billions – the justices also expressed concerns over DOL’s use of amicus briefs to declare new policies. Justice Breyer questioned whether the Secretary of Labor even weighed in before the new position was advanced by the lawyers in the Solicitor’s Office of the DOL. He further indicated that the DOL should have first engaged in administrative notice-and-comment rulemaking, giving all affected parties notice before changing course on the exempt status of the PSRs. Justice Scalia asked whether it was the DOL’s policy making program to “run around the country” and make new regulations through amicus briefing. Department of Justice Deputy Solicitor General Malcolm Stewart, arguing on behalf of the United States, admitted that the DOL had received a request for an opinion letter in 2007, inquiring as to whether PSRs were outside salesmen, but that it never responded. Justice Scalia stated that he found it “extraordinary” that the DOL was going to come in – without engaging in any prior enforcement actions or issuing any agency guidance on the issue – and proclaim that 90,000 people are now owed retroactive overtime. One final point made by Mr. Clement – and echoed by Justice Ginsburg – was that, even if it is found that the PSRs do not meet the outside sales exemption requirements, the issue is not fully resolved as the position could still qualify for the administrative exemption under the FLSA. The application of the administrative exemption is not currently at issue before the Supreme Court.

This case has far reaching implications as there are over 90,000 PSRs employed by the pharmaceutical industry. In addition, the case will likely have a broader impact on the manner in which an agency can announce new positions. A decision is expected by the end of June. We will prepare a complete analysis of the decision once it is issued.

To learn more about the case and its potential implications for employers, please see Littler's ASAP, Supreme Court to Decide Significant Case on the Outside Sales Overtime Exemption, by Richard Black and Bradley Strawn.

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Some candidates were retained by Surrex as consultants, and their services were leased to Surrex’s clients. The plaintiffs’ compensation for this type of placement was a percentage of the “adjusted gross profit” earned by Surrex. The starting point of this calculation was the rate received from Surrex’s client for the services of the consultant. From this, Surrex subtracted the costs of employing the particular consultant – typically the consultant’s pay, benefits, and expenses as well as an overhead adjustment factor. Commissions were paid as a percentage of the resulting “adjusted gross profit.”

The plaintiffs argued that only time spent finding new client companies was time spent selling, and contended that none of their work to identify and recruit candidates was sales activity. The court rejected this argument. Finding that the plaintiffs’ “primary duty was to recruit ‘candidates’ for employer ‘clients,’” the court agreed with the trial judge that ignoring all the activity that must be done before the actual point in time when a sale is made “perceives the word sales in a vacuum contrary to the job description of any salesman.” The tasks associated with identifying job candidates were “essential prerequisites necessary to accomplishing the sale.” Finding these activities to be sales related, the court concluded that the plaintiffs were “employed principally in selling a product or service.”

The plaintiffs also argued that pay earned as a percentage of the “adjusted gross profit” could not qualify as a commission because the formula was “far too complex” and was not based solely on the price of services sold. They contended that California courts require that a “commission” be based solely on a percentage of price. The Muldrow court rejected this argument, branding it an “excessively narrow and wooden application” of prior cases, neither of which had any occasion to address the question.

The court also distinguished decisions cited by the plaintiffs because the employees in those cases increased the profitability of their companies by increasing revenue, while plaintiffs’ efforts affected not only the revenue received by Surrex, but the costs incurred. A compensation plan based solely on price would reward the plaintiffs’ efforts to increase profits by increasing revenue, but do nothing to reward those who helped Surrex achieve greater profits by limiting costs. Referencing older cases addressing commission disputes, the court noted that “a commission based on profits is hardly a concept foreign to California law.” The court concluded that “Surrex’s commissions were sufficiently related to the price of services sold to constitute commissions for purposes of the commissioned employees exemption (Cal.Code. Regs., tit. 8, § 11070, subd. (3)(D)).”

The Muldrow decision applies a dose of common sense in answering some fundamental questions that had not been answered before. In the future, however, employers should consult counsel before relying on Muldrow, to be certain that it has not been taken up for review before the California Supreme Court. Once review is granted, as those who are “waiting for Brinker” are well aware, a case cannot be cited or relied upon in court proceedings. Because it provides new answers, Muldrow is a potential candidate for review.

In the course of their employment, the banquet sales managers received a handbook that stated that all contracts must be pre-approved by supervisors before the banquet sales managers could sign them. Additionally, prices were fixed by their supervisors, and “sales managers were not permitted to deviate or discount in any way without management approval.”

A number of banquet sales managers sued claiming that they were misclassified under the FLSA, as well as the wage and hour laws of Massachusetts and Rhode Island. The district court granted the employer’s motion for summary judgment, concluding that the banquet sales managers were exempt employees. The banquet sales managers then appealed to the First Circuit.

The First Circuit affirmed the district court’s decision, concluding that the banquet sales managers qualified as exempt administrative employees. The primary issue on appeal was whether the banquet sales managers exercised sufficient discretion and independent judgment to qualify for the exemption. The court rejected plaintiffs’ argument that they fell outside this exemption because they had no supervisory, policymaking, or financial decision-making authority. The court reasoned such authority “is a factor that the regulations instruct us to consider, it is not, however, a requirement.” According to the court, “working with a client to create a custom product, personalized to individual tastes and budgets” constitutes sufficient discretion and independent judgment to satisfy the requirements of the administrative exemption. Moreover, the court noted that “an employee’s discretionary action need not ‘have a finality that goes with unlimited authority and a complete absence of review.’”

Image credit: Tracy Hunter