The REAL Reason the Supreme Court’s Ruling on Sales Representatives Is Important for Contractors

July 11, 2012 | from AdminBerenson No Comments

The Fair Labor Standards Act (“FLSA”) has always had an exemption for outside sales representatives – we frequently use it in defending audits by the Department of Labor (“DOL”) against contractors. The FLSA defines an outside salesman, in part, as any employee whose primary duty is making any sale. The definition seems simple enough, and what it means is that sales representatives are not subject to federal overtime or minimum wage requirements under the FLSA.

However, Congress delegated authority to the DOL to issue regulations to define the FLSA. Over the years the DOL has decided to try to narrow the ability of businesses to use the outside sales representative exemption. Starting in 2009, the DOL decided that it wanted a much narrower definition of what a “sale” was for the purposes of the outside sales exemption. The DOL decided that a “sale” could not really take place unless the sales representative had actually purchased the product from the businesses, and was re-selling it to the consumer or end-user.

Put another way, in our industry, this would mean that a sales representative would need to buy the tub liners, windows, or roofing before he could truly sell those products to a consumer, and qualify as an outside sales representative under FLSA. Of course, the definition does not say that, and that interpretation seems ridiculous on its face, but that is what the DOL was trying to do.

In the case before the Supreme Court, several SmithKline pharmaceutical sales representatives brought suit against the company arguing that SmithKline violated the FLSA by failing to compensate them for overtime hours worked, and relied on the DOL’s new interpretation of what a sale really was – and that they were not really exempt as outside sales representatives.

On June 18, the Supreme Court disagreed, saying that the DOL’s interpretation was “flatly inconsistent with the FLSA,”. Moreover, the Court noted that the representatives, who earned an average of more than $70,000 per year and who worked on their assigned portfolio of drugs between 10 and 20 hours outside of normal business hours, “are hardly the kind of employees that the FLSA was intended to protect.”

So, is this ruling important? Well, of course it is, in that it hammers back the DOL’s efforts to legally castrate the outside sales representative exemption – although as to our industry the DOL has never really pushed their narrowed definition. What is somewhat shocking, frankly, is that the Supreme Court actually ruled on this 5-4, and that four of the sitting judges actually thought the DOL’s argument was prudent. Where the real impact may yet be felt, however, is that this ruling essentially told a federal government agency that their attempt to internally “reinterpret” laws and regulations, ostensibly to further their own goals or political mandate, will not withstand true legal scrutiny. This agency reinterpretation has been impacting our industry over the past few years primarily as to the EPA’s attempts to severely restrict the lead paint law exclusions (such as the minor repair and maintenance exemption) and OSHA’s effort to impose fall prevention requirements on siding, painting and window contractors. Going forward, we expect agencies will need to be more restrained in their efforts to reinterpret their own laws.