Function Over Form: The Supreme Court's Realistic View of the FLSA

Posted 2:02 PM by Michael Fox

For those who think that one of the travesties of the recent history of employment law has been the explosion of FLSA collective action litigation, today's 5-4 decision by the Supreme Court holding that pharmaceutical representatives are in fact exempt employees under the outside sales exemption is a re-affirmation that common sense can in fact prevail.  Christopher v. SmithklineBeacham Corp. (6/18/12).

Although a critical decision for the pharmaceutical industry in its own right, the case has generally been viewed more importantly for its insight as to the weight the Supreme Court would give to agency views of the laws they enforce. Here the DOL had weighed in as amicus in a series of law suits arguing that the pharmaceutical sales reps were not exempt, although the DOL had given differing views as to why that was so.

The majority opinion begins with Justice Alito's description of why the DOL's position is not entitled to deference. Perhaps more significantly, the dissent written by Justice Breyer, the member of the court with the most claim to administrative law expertise, agrees. In fact, on this key point, it would be fair to say that this is a 9-0 decision. Justice Breyer writes:

In light of important, near-contemporaneous differences in the Justice Department’s views as to the meaning of relevant Labor Department regulations, I also agree that we should not give the Solicitor General’s current interpretive view any especially favorable weight.

Although casting the blame on the Department of Justice, not the Department of Labor, it is clearly a rebuke to the DOL.

Having jointly rejected the DOL's view, the two wings of the Court still reach a different outcome on their own independent review of the exemption.

The problem is that we have a 1938 statute designed for a very simple economic model which existed at the time was adopted.  The FLSA was designed for an even pre-Leave it to Beaver world, where a factory was divided between the white collar workers in the front office and the blue collar workers in the back, whose product was sold by the Willy Loman's of the world, who packed their sales bag and left on Monday through Thursday and returned to do their paper work on Friday.  Trying to use regulations written for that world, in today's workplace results in often ludicrous results.

It seems clear to me that the Supreme Court understands this historical fact, at least as relevant to the outside sales exemption, as it noted that the DOL had been authorized by the statute to issue regulations, and that those regulations were issued in 1938, 1940 and 1949, and in 2004 "following notice-and-comment procedures, the DOL reissued the regulations with minor amendments." Although they limit that historical reference to the outside sales exemption, I think a review would indicate that it is applicable for much of the remainder of the FLSA and its regulations as well.

The points relied on by the majority in rejecting the formalistic view of the minority are significant and could be utilized by other courts to rein in what has been an overly mechanistic view of the FLSA:

• that until 2009, the pharmaceutical industry had "little reason to suspect that its longstanding practice of treating detailers as exempt outside salesmen transgressed the FLSA."
• that the DOL had never initiated any enforcement actions or otherwise suggested that it thought the industry was acting unlawfully.
• the realization that pharmaceutical sales reps, whose average income is $90,000 a year according to the opinion,  "typically earn salaries well above the minimum wage" and enjoyed other benefits that "set them apart from the nonexempt workers entitled to overtime pay." Hardly the kind of employees the FLSA was intended to protect.
• That it would be "challenging, to say the least" for pharmaceutical companies to compensate reps for overtime going forward without significantly changing the nature of that position.
• Rejecting a legalistic argument, that requires title to pass, to instead taking a more "realistic approach" of what the outside salesman exemption is meant to reflect.

Let me be clear what my argument is. At least with respect to mis-classification cases, in the last 10 years plus, the FLSA has been used to extract tremendous sums from employers, who had no intent to cheat or abuse their workers. The beneficiaries of that extraction have been employees, who generally knew what their job involved and knew what they were going to be paid for doing it. In other words, the true economics were already baked in, and an after the fact application of a formalistic approach, with its accompanying lack of "fair warning" discussed by Justice Alito, is not a good economic use of resources.

The biggest beneficiaries of course have been the repeat players, lawyers who represent the plaintiffs in those cases, who of course have taken their share of the extraction, and lawyers who represent the defendants (including me and my firm) in those cases. 

In a world where there are many issues that call out for righting, for the most part mis-classification under the FLSA has not been in my mind a worthy fight. Today's decision is by no means the end, but it is at least a bright and correct light.

Labels: FLSA, Supreme Court