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FLSA Exemption Subject to Factual Context and Industry Practice

Which employees are exempt from overtime and which are not? Pursuant to the federal Fair Labor Standards Act (FLSA) and related state laws, employees are presumed exempt (and thus eligible for overtime) unless the employer can demonstrate otherwise. This means the employer must show an employee falls within one of the recognized exemptions to the federal and state requirements.

The three most common exemptions are professional, executive, and administrative, but there are others as well, including the “outside salesperson” exemption. A U.S. Supreme Court case decided a few years ago illustrates the issues this exemption can present. Christopher v. Smithkline Beecham Corporation, 132 S.Ct. 2156 (2012). In that case, sales representatives went to doctors’ offices to market the company’s drug products. Because the sales reps did not make actual sales they contended that they had been misclassified and were thus entitled to overtime pay. In support of their position, they pointed to the U.S. Department of Labor’s (DOL) definition of “outside salesperson.” The Ninth Circuit Court of Appeals rejected their argument, holding they were properly classified as outside salespersons.

Meanwhile, the Second Circuit Court of Appeals addressed the exact same issue and reached the opposite conclusion. The Supreme Court granted certiorari to resolve these conflicting viewpoints. In a 5–4 decision, the Supreme Court sided with the Ninth Circuit, finding deference should not be extended to the DOL’s definition, which included a requirement that a “sale” involve the actual transfer of title. The Court concluded this definition was “flatly inconsistent” with the FLSA, which defines the term “sale” to mean only “a consignment of sale.” Therefore, sales representatives who obtained nonbinding commitments from physicians to purchase and prescribe certain drugs were engaged in sales and properly classified as exempt.

The Supreme Court’s decision is instructive. Beyond providing a broader definition of the outside salesman exemption, the decision reaffirms the understanding that industry practice and factual context carry weight in how the exemptions are applied to particular situations. Further, the decision reveals that while deference is given to the DOL and the state agencies charged with enforcing these laws, courts will nevertheless reject agency regulations and interpretations which, in the courts’ view, are at odds with the statute at issue. Ultimately, the decision also underscores the ambiguities presented when trying to comply with wage and hour laws and why employers must proceed with great caution if they are to avoid unanticipated overtime and related liabilities.

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