In a closely watched case, Christopher v. SmithKline Beecham Corp., the U.S. Supreme Court has clarified employee exemption by ruling on the claim of two former pharmaceutical sales representatives, backed by the Department of Labor (DOL), who believed they were owed overtime pay.

On June 18, 2012, the nine Supreme Court Justices voted 5 to 4 to reject that claim, further defining employee exemption. Here’s a look at what happened and a reminder to employers of the requirements of the Fair Labor Standards Act (FLSA).

FLSA and Overtime

The 1938 FLSA is one of the hallmarks of the New Deal. It laid the foundation for the federal minimum wage, overtime pay, recordkeeping, and youth employment standards affecting covered nonexempt workers in the private and public sectors.

Technically, the FLSA is only applicable to employers engaged in “interstate commerce” (generally interpreted as any employer with at least $500,000 in revenue). But employers that might escape its requirements often choose to comply for practical reasons, including the risk of wrongly assuming that they are not covered.

Since 1938, the law has been amended on a regular basis, and legal disputes have arisen over, among other issues, which workers are exempt from the FLSA requirements.

Which Employees Are Exempt?

The general answer is executive, administrative, professional, computer and “outside sales” employees. For outside sales people to be exempt from FLSA, the DOL says the following conditions must be met:

-The employee’s primary duty must be making sales (as defined in the FLSA) or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and

-The employee must be customarily and regularly engaged away from the employer’s place or places of business.

Supreme Court Decision

In Christopher v. SmithKline Beecham Corp., the Supreme Court rejected the DOL’s interpretation of the FLSA requirements for employee exemption as they related to the pharmaceutical sales reps.

The DOL and the plaintiffs argued that because they were only employed to encourage physicians to prescribe SmithKline Beecham drugs to their patients but didn’t actually sell drugs directly to the physicians, they were not truly outside salespeople. Thus, they were entitled to overtime pay under the FLSA.

Justice Alito, writing the majority opinion, pointed out that the FLSA was intended to help workers at the lower end of the pay scale.

“The exemption is premised on the belief that exempt employees normally earn salaries well above the minimum wage,” he wrote. The salespeople in this case, who earned in excess of $70,000, “are hardly the kind of employees that the FLSA was intended to protect.”

New Interpretation Shot Down

Alito acknowledged the vagueness surrounding employee exemption and the FLSA requirements. But he wrote that the decision should focus on employees’ functions and responsibilities, rather than their titles, especially in “the particular industry in which the employee works.”

Alito said that the DOL had introduced a new interpretation of the FLSA that favored the plaintiffs’ arguments in this case (that they were not exempt employees and, thus, entitled to overtime) “despite the [pharmaceutical] industry’s decades-long practice” of treating such employees as exempt.