Employers and courts have been busy in recent years shaping wage-hour laws that were long dormant. The applicability of several, limited “exemptions” to the rules that entitle employees to minimum wage, overtime, and other wage and hour protections has been the subject of a great deal of litigation.
One of the exemptions from many wage-hour laws applies to employees engaged in “outside sales.” The exemption applies to employees who are customarily or regularly engaged away from the employer’s business in making sales or obtaining orders for contracts or services. However, with the days of the door-to-door salesperson virtually obsolete, employers are applying the exemption in a variety of contexts, with mixed results. Two recent cases evaluate whether certain workers qualify as exempt “outside salespeople.”
The Ninth Circuit: Christopher v. SmithKline Beecham Corporation
The Ninth Circuit Court of Appeals recently considered whether pharmaceutical sales representatives (“PSRs”) are exempt salespeople under the federal Fair Labor Standards Act. In Christopher v. SmithKline Beecham Corporation, GlaxoSmithKline hired PSRs to visit physicians to educate them about and encourage them to prescribe specific medications to their patients. Because federal law prohibits PSRs from actually selling drugs to the physicians, PSRs did not engage in a literal “sale”—that is, the exchange of money for a product or service. Instead, the PSRs attempted to gain from a physician the highest commitment they lawfully could: a verbal commitment to prescribe the product.
Much like traditional salespeople, the employer paid PSRs a base salary and incentive compensation. The incentives were based on increases in sales volume, revenue, or dose volume of a product prescribed in the PSR’s region.
The plaintiffs claimed that they were not “salespeople” and, therefore, not covered by the “outside sales” exemption, because they did not “sell” anything. Instead, they argued that they were performing non-exempt “promotional” work. The employer argued that the FLSA’s broad definition of the term “sale” or “sell” to include “any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition” included the duties performed by the PSRs.
The U.S. District Court for the District of Arizona agreed with GlaxoSmithKline, finding that the PSRs fit within the “terms and spirit of the exemption,” were highly compensated and received incentive compensation in lieu of overtime, and ultimately sought to receive the highest level of commitment from the physician that was possible, given the highly regulated nature of the industry. Accordingly, the court granted summary judgment for the employer.
In affirming the district court’s ruling, the Ninth Circuit Court of Appeals noted that the regulations defining the exemption have changed little in the last 50 years. The court took into account market realities, stating, “[i]n this industry, [a] ‘sale’ is the exchange of non-binding commitments between the PSR and physician at the end of a successful call…” In other words, because the PSR was not legally able to exchange the product with the physician for cash, obtaining a verbal commitment to prescribe a product for others to purchase, constituted an “other disposition” within the meaning of the FLSA’s definition of “sale.” For this reason, the Ninth Circuit held that PSRs were properly classified as outside salespeople.
The Secretary of Labor, responsible for interpreting and enforcing the FLSA, filed a brief “amicus curiae,” advocating the PSRs were not salespeople under its interpretation of the regulations. Agreeing with the plaintiffs, the Secretary argued that the work of the PSRs did not involve “mak[ing] a sale.” But the Ninth Circuit declined to defer to the Secretary’s interpretation. Because the Department of Labor’s regulations merely “parroted” the statute and did not meaningfully interpret it, the court stated that it did not owe the agency any deference.
The Second Circuit: In re Novartis
Although the outside sales exemption has been around for decades, the courts still do not agree on its scope. Shortly before the Ninth Circuit issued its decision in Christopher v. SmithKline Beecham Corporation, the Second Circuit Court of Appeals reached the opposition conclusion on nearly identical facts.
Novartis’ argument that the PSRs received a “commitment” from the physician did not persuade the Second Circuit that they were engaged in selling. The physician’s stated commitment was not a commitment to buy, or even a binding commitment to prescribe. So, in the Second Circuit’s analysis, the PSRs’ work was not exempt “sales” work.
Unlike the Ninth Circuit, the Second Circuit granted deference to the Secretary of Labor’s interpretation of the FLSA and the stricter definition of the term “sale.” The Second Circuit disagreed that the Secretary’s interpretation merely “parroted” the regulations. The court held that “[a]lthough the phrase äóÖother disposition’ is a catch-all that could have an expansive connotation,” the regulations required that the “other disposition” be “in some sense a sale.”
The Significance to Other Salespeople
The courts’ reasoning in the Christopher and Novartis cases likely extends beyond the limited context of PSRs. The Ninth’s Circuit’s broad definition of “sale” suggests it is willing to apply the law with an awareness of market realities. In contrast, the Second Circuit’s more rigid definition makes clear it will apply the FLSA more literally, despite the difficulty it may create in a market that no longer employs nearly so many traditional “salespeople.”
The disagreement between the Second and Ninth Circuits may not be reconciled soon. Novartis petitioned the Supreme Court for review, but the Court declined to hear the case. For the time being, an employer with operations in different states will find it particularly challenging to uniformly apply the exemption.
What About California Law?
Employers operating in California face the additional challenge of determining whether the state’s outside salesperson exemption applies to sales employees. Even if an employee is exempt under the FLSA, an employer must still pay overtime and provide other wage and hour protections required by state law, unless the employee is also exempt from state law.
California courts often look to FLSA regulations to interpret California’s wage and hour rules. But in Ramirez v. Yosemite Water Company, a case in which the California Supreme Court addressed the outside sales exemption, the Court declined to follow the FLSA to determine whether the requirements of the California outside salesperson exemption are met. Unlike federal law, California law imposes a strict quantitative standard, requiring an employee spend more than 50 percent of the time conducting sales.
The plaintiff in Ramirez delivered water bottles to residential and business customers. The employer also tasked the delivery drivers with selling additional products to the customers and generating leads for new sales. When Ramirez sued for overtime, the employer argued that he was an exempt outside salesperson, and that his “primary duty”—his most important function—was sales or tasks broadly construed as supportive of sales. Relying on the FLSA regulations, the employer claimed delivering water and driving his truck were that work “incidental” to his sales and, therefore, counted as exempt work.
The California Supreme Court noted that the California Industrial Welfare Commission chose not to track the language of the federal exemption and instead adopted its own definition of “outside salesperson.” Therefore, because the California definition of “outside sales” depended in part on the time spent selling, the court held that California law provides greater protection for employees than the FLSA The court also decided that tasks that are incidental to sales work, but do not involve actual “selling”—such as deliveries—do not count toward the “more than 50 percent” requirement under California law.
The California Wage Order does not define the term “sale,” so it is unclear under California law whether the work of pharmaceutical salespersons would be considered “sales” work. Given Ramirez, California courts may choose not to follow the Ninth Circuit’s interpretation of FLSA regulation when interpreting the California exemption. Therefore, the Ninth Circuit’s ruling in Christopher does not provide California employers with direction about how expansively to apply the concept of “sales” when applying the state outside salesperson exemption.
Guidance for California Employers
Employers in California can take steps to put themselves in the best possible position when attempting to take advantage of the outside sales exemption. First, employers should carefully analyze the duties of a sales position to ensure that the majority of the employees’ time is spent selling rather than engaging in other activities unrelated to the sales function. Employers should treat sales as a separate, independent function—not an “add on” task incidental to deliveries or processing orders already sold by someone else.
Employers also must communicate their expectations to employees, generally in a well-drafted job description. Management should monitor whether job descriptions accurately describe what employees actually do.
The outside sales exemption does not require a particular type of compensation. However, a compensation system based on sales, such as commissions, may help employers prove the employees’ primary duties involve selling.
Finally, for the outside sales exemption to apply, the employees must make sales and obtain orders “outside,” i.e., away from the workplace. An alternate fixed site, like the employee’s home, will not suffice.
Of course, each case is fact-specific. Following these general guidelines will not guarantee success against a challenge to the exemption. As with most wage-hour issues, employers must do their best to know the rules are and then formulate their policies and practices to conform with the legal requirements. In wage-hour matters, surprises are rarely welcome and are usually costly.