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Overtime Pay: Exempt or Not?

Aug. 15, 2012
As work environments and duties evolve, so too may the status of your employees. Regular reviews can help avoid costly classification errors.

Pharmaceutical manufacturers breathed a sigh of relief in mid-June when the United States’ top court ruled in their favor on an overtime pay case that threatened to prove costly to the industry had the decision gone differently.

It is no wonder they are relieved. The opposite outcome “could have had a dramatic effect on how pharmaceutical manufacturers do business,” says Lisa Schreter, a lawyer with Littler Mendelson and co-chair of its wage and hour practice.

In a 5-4 decision, the U.S. Supreme Court ruled that pharmaceutical representatives who call on doctors’ offices to promote their products meet the “outside sales” exemption under the Fair Labor Standards Act. In short, they are exempt from receiving overtime pay for hours worked beyond 40 in a work week.

The issue came before the high court by way of several appeals to lower court decisions. The case was initiated by two former pharmaceutical representatives for GlaxoSmithKline (IW 1000/105). The plaintiffs argued they did not actually make sales when meeting with doctors—federal regulations prohibit it—but merely advocated the prescribing of their products in appropriate circumstances. Given that work description, they claimed, they failed to qualify as outside sales representatives subject to an overtime exemption.

A majority of the court disagreed. “…we conclude that petitioners qualify as outside salesmen under the most reasonable interpretation of the DOL’s regulations,” wrote Justice Alito, who delivered the Supreme Court’s opinion on Christopher v. Smithkline Beecham Corp.

Schreter described the Supreme Court’s finding as a “very loud rejection of how this Department of Labor approached the interpretation of the outside sales exemption,” at least as it relates to pharmaceutical representatives.

A Challenge in All Industries

The issue of employee classification is a challenge for employers in all industries, Schreter says. Therefore, while the recent Supreme Court case addressed pharmaceutical representatives specifically, there are lessons to be learned for all industries, not the least of which is to review how employees are classified.

For example, pharmaceutical companies are not the only manufacturers who use outside sales representatives. Any manufacturer that employs an outside sales force and who relies on the overtime exemption would be wise to review their employees’ work practices to assure they still meet somewhat ambiguous exemption requirements. The “point of attack,” Schreter says, is the answer to the question: Are the sales representatives actually outside the employer’s premise calling on customers and making sales?

Advances in technology may have changed that answer. “How we sell goods in this country has fundamentally changed,” the lawyer points out. In instances where face-to-face selling has given way to telephone and email selling, so too has an exempt status possibly given way to non-exempt status.

“I can’t think of a bigger trap for the unwary,” Schreter says.

Litigation 'All Over the Board'

Another position that has been the subject of considerable litigation is the front-line or shift supervisor, the lawyer says. In a growing number of such cases, plaintiffs argue that if a person spends much of the time performing the same duties as everyone else and appears to have little in the way of supervisory duties, they should not be classified as exempt workers. In such instances, it may prove challenging to defend an exempt-from-overtime pay classification even if the employee meets other qualifications.

Litigation in this area “is all over the board,” Schreter says, and is very fact-specific. Typically, one wants to see the exempt supervisor have authority to make recommendations about hiring, firing and discipline.

Changing regulatory requirements and evolving workplaces can turn what was once an exempt position into a non-exempt position, the lawyer notes. By the way, she adds, a misconception by many is that paying employees a salary makes them exempt from overtime by definition. That is incorrect. “It is one piece of the analysis,” Schreter says.

Her broad takeaway: Workplaces are constantly changing. In response, employers are modifying what their workforces do and how they do it. Always question how those modifications may affect a worker’s exempt status, and don’t simply rely on the human resources or legal department to police such activity.

“It requires collaboration,” Schreter says.

See the companion story, "Wage and Hour Lawsuits Proliferate"

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