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N.D.Ohio: Where Defendant Retains Right to Reject Contracts Obtained by Door-to-Door Solicitors, Otherwise Allowed by Law to Enter Into Contracts, Outside Sales Exemption Inapplicable
Hurt v. Commerce Energy, Inc.
Following the United States Supreme Court’s decision in Christopher v. SmithKline Beecham Corp., courts continue to grapple with the issue of who is engaged in making sales, within the definition of the FLSA’s outside sales definition versus who simply helps solicit or promote sales to be made by others. This recent case distinguished door-to-door solicitors, who worked for the defendant energy company, from Christopher, and held that their duties could be non-exempt and more akin to those of the student salesman and military recruiters that Christopher in turn had distinguished from the pharmaceutical sales reps involved in that case. As such, the court denied the defendant’s motion for summary judgment. In so doing, the court provided some needed guidance on the issue of who is engaged in sales and who is not, for purposes of application of the “outside sales exemption.”
The court discussed the following facts relevant to this issue:
The Plaintiffs worked as door-to-door salespeople for Just Energy Marketing. They worked at various times from 2009 to 2013 at Just Energy’s Beachwood, Ohio office. During most of that time, Dennis Piazza was the regional distributor for the Beachwood office. Just Energy says that Piazza is an independent contractor himself, and his business is separately incorporated as Star Energy, Inc.
A. Ohio Regulations & PUCO
Because Just Energy operates in multiple states, it adopted policies to have its door-to-door workers comply with Ohio regulations. Specifically, in Ohio, the Public Utilities Commission of Ohio (“PUCO”) regulates energy suppliers like Just Energy. Generally, PUCO requires suppliers who solicit door-to-door to provide customers with acknowledgment forms; have independent third-party verification of at least fifty percent of all its customers; print terms and conditions in tenpoint type or greater; and require the door-to-door solicitors to display a valid photo identification.
But Just Energy’s door-to-door solicitors have additional requirements. In 2010, Commerce Energy entered into a settlement agreement with the Ohio PUCO to renew its retail natural gas supplier certificate. That agreement resulted from an investigation into customer complaints about the sales, solicitation, and enrollment practices of Just Energy’s residential door-to-door solicitors.
In the settlement, Commerce Energy agreed to implement an in-state quality assurance program “to provide the company with additional oversight of its sales force, as well as retrain all Ohio sales agents to assure compliance with PUCO’s rules.” Commerce also agreed that all its new customers would be subject to a new third-party independent verification process. That process requires door-to-door solicitors to initiate a third-party verification call before leaving the premises. The solicitors cannot be present on the premises during the call, and they cannot return to the premises after the call. Just Energy’s policies for its Ohio door-to-door solicitors reflect these requirements.
B. Hiring and Orientation
For its door-to-door solicitors, Just Energy often hires low-skill workers, many without prior sales experience. At its Beachwood office, Just Energy regional distributors and supervisors conducted short interviews before hiring these workers, sometimes completing the interviews in large groups. After the interviews, Just Energy required its solicitors to sign employment contracts.
The contracts required the Plaintiffs to comply with federal, state, and local laws and regulations and Just Energy Marketing’s codes of behavior. Further, the contracts said that the Plaintiffs would be paid a commission “according to the commission schedule in place at the time.” During the Plaintiffs’ employment, the commission schedule said that Just Energy paid the Plaintiffs approximately $35 for every order that they obtained. According to Just Energy, the Plaintiffs also “enjoyed the potential to earn productivity bonuses and additional commissions if customers remained with Commerce for certain periods of time.” But if “a customer cancelled an agreement after signing, then no commissions were paid at all; if the customer cancelled after the commission was already paid, it was subject to recoupment.”
After signing their employment contracts, Just Energy required its door-to-door workers to attend an orientation session led by a regional distributor. These orientation sessions covered a number of topics “including company and industry background, the products and services being sold, and helpful sales techniques.” After the orientation, Just Energy generally required the Plaintiffs to shadow a more experienced solicitor in the field for one or two days before soliciting customers on their own. Just Energy provided a script for the workers to use with customers. The Plaintiffs used these scripts to varying degrees.
C. Disputed Roles and Responsibilities
Just Energy and the Plaintiffs disagree about their respective roles and responsibilities. According to Just Energy, the Plaintiffs’ primary responsibilities were “knocking on potential customers’ doors, selling Commerce’s services and obtaining signed sales agreements for Commerce’s energy supplies.” Just Energy says that the “Plaintiffs were absolutely allowed to travel and work independently.” It says that they worked free from supervision, and Just Energy did not require them to work particular hours. Both parties agree, however, that the Plaintiffs worked approximately six to seven days a week for approximately twelve hours a day.
In contrast, the Plaintiffs say that Just Energy subjected them to significant supervision. They say that Just Energy regional distributors and supervisors controlled the length of the Plaintiffs’ work week and work day by assigning them to a work crew and van, sending the vans to solicit specific neighborhoods, and prohibiting the vans from returning to the office before 9 p.m. The Plaintiffs also say that Just Energy regional distributors required the Plaintiffs to knock on a specific number of doors and obtain a certain number of orders, required the Plaintiffs to report to the office every morning, prevented the Plaintiffs from working independently, controlled the Plaintiffs’ break time, and required the Plaintiffs to purchase and wear Just Energy branded clothing.
Initially, the court rejected the defendant’s contention that the plaintiffs “made sales” as defined by the outside sales exemption, as a matter of law:
The Plaintiffs’ evidence raises a genuine issue of material fact about whether they were “making sales,” and thus, qualified as outside salesman. FLSA does not define “outside salesman,” instead leaving it to be “defined and delimited … by regulations of the Secretary [of Labor].” The Department of Labor defines “outside salesman” as “any employee … [w]hose primary duty is … making sales within the meaning of [29 U.S.C. § 203(k) ]” and who is “customarily and regularly engaged away from the employer’s place or places of business in performing such primary duty.” Section 203(k) defines a “sale” as “any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.”
In Christopher v. SmithKline Beecham Corp., the United States Supreme Court found that pharmaceutical representatives were exempt outside salespeople even though they did not actually accomplish a “sale” of drugs to the patient. Because Congress meant to define sales broadly to “accommodate industry-by-industry variations in methods of selling commodities,” the Supreme Court said that courts should consider the impact of regulatory requirements or “arrangements that are tantamount, in a particular industry, to a paradigmatic sale of a commodity.” Thus, because federal regulations prevented the pharmaceutical representatives from engaging in the actual sale of drugs to the patient, the Supreme Court found it was enough that the representatives “promoted” sales to doctors who in turn made “nonbinding commitments” to prescribe the drugs to their patients.
In Clements v. Serco, the United States Court of Appeals for the Tenth Circuit held that military recruiters were not exempt outside salespeople because they lacked the authority to enlist a recruit. There, recruiters “sold” potential recruits on the idea of the Army, but the Army retained the authority to enlist recruits. The Tenth Circuit held that the recruiters did not “make sales” because the Army required the recruits to report to a military processing station for a physical, job selection, and an oath before enlisting. Because the Army retained discretion to enlist a recruit, the recruiters were not outside salesman.
Similarly, in Wirtz v. Keystone Readers, the United States Court of Appeals for the Fifth Circuit found that “student salesman” were not outside salesman. There, a company hired student salesman to “obtain orders” for magazine subscriptions by door-to-door solicitation. The company required the student salesman to give their order cards to a “student manager,” who then contacted the customer, verified the customer met the company’s qualifications, and passed the order on to a “verifier.” The verifier then checked the order to make sure that the customer met the company’s qualifications. Only then did the company execute a contract. The Fifth Circuit concluded that the student salesman were not outside salesman because they did not “mak[e] sales of their own.”
Taking the evidence in the light most favorable to the Plaintiffs, Just Energy fails to show, as a matter of law, that the Plaintiffs “made sales.” Just Energy says that Christopher should control because the Plaintiffs obtained “far more” than the nonbindinding commitments at issue in Christopher. The Court agrees that the Plaintiffs obtained contracts, but Christopher is distinguishable.
The court reasoned that unlike the pharmaceutical reps in Christopher, here the plaintiffs were not prohibited from entering into binding contracts as a matter of law, rather it was defendant’s internal policies alone that stopped them from doing so:
Unlike the pharmaceutical representatives in Christopher, the Plaintiffs are not prohibited from completing a contract by state or federal regulations. Instead, Just Energy prevented the Plaintiffs from completing a sale by retaining unlimited discretion to accept and reject the orders obtained by the Plaintiffs. For example, in Just Energy’s New Customer User Guide, Just Energy says: “This Agreement will become firm and binding when (i) Just Energy accepts this Agreement, and (ii) the LDC [local distributor] accepts and successfully implements the Customer’s enrolment submission from Just Energy.” Similarly, in Just Energy’s Regional Distributor Services Agreement, Just Energy says: “The Service Provider and the Principal understand and agree that JUST ENERGY or any Affiliate thereof retain the sole and unfettered discretion to reject any Energy Contract submitted (whether by an Independent Contractor, the Principal or the Service Provider).”
Here, neither Ohio law nor the PUCO agreement require Just Energy to retain unlimited rejection authority. And Just Energy has failed to provide evidence showing that this right to reject contracts was necessary to comply with regulations or the PUCO agreement. Just Energy has not shown that it accepts agreements that comply with the applicable regulations. The contracts the Plaintiffs bring to Just Energy are merely proposals until Just Energy accepts them. Therefore, because Just Energy retains an unlimited right of rejection, the Plaintiffs are more like the student salesman in Wirtz and the military recruiters in Serco whose employers retained discretion to accept and reject their orders.
Additionally, like the magazine company in Wirtz, Just Energy required the Plaintiffs to submit their orders for further review before Just Energy chose to accept or reject them. While it is true that Just Energy’s evidence shows that the PUCO agreement requires Just Energy to conduct third-party verification, Just Energy has failed to show that the regulations require a credit check and approval of the customer by the local distributor. Thus, the Plaintiffs’ evidence raises a genuine issue of material fact about whether the Plaintiffs were “making sales,” and thus, qualified for the outside salesman exemption.
The court also reasoned that the “external indicia” did not support defendant’s contention that the plaintiffs were engaged in outside sales, further distinguishing the case from Christopher. Last, the court relied on the FLSA’s purpose, and reasoned that here- unlike the $70,000 a year (plus) pharmaceutical reps at issue in Christopher– the FLSA’s guiding principles supported a finding that the plaintiffs were not outside sales exempt.
Subsequent to this decision, the defendant sought interlocutory review of the decision, but the motion for same was denied. Nonetheless, this one is likely headed to the Sixth Circuit, and it’s unclear what they will do with it. Stay tuned for a further update here if/when the Sixth Circuit ultimately weighs in.
Click Hurt v. Commerce Energy, Inc. to read the full Opinion and Order.
U.S.S.C.: Court Grants Certiorari to PSRs on Appeal of 9th Circuit Decision Holding Pharma Reps Exempt Under the FLSA’s Outside Sales Exemption
Christopher v. SmithKline Beecham Corp.
In a case with far sweeping ramifications for the pharmaceutical industry and its employees, the Supreme Court has granted certiorari to revisit the Ninth Circuit’s decision that held pharmaceutical representatives (pharma reps) to be exempt under the FLSA’s outside sales exemption, and therefore, entitled to overtime. The Supreme Court has granted Plaintiff’s Petition for Cert, and therefore the issue remains largely unresolved. In a decision discussed here, the Second Circuit had previously held that the pharma reps were non-exempt, notwithstanding the pharmaceutical companies’ arguments that they were outside sales and/or administrative exempt. While, the Third Circuit agreed that pharma reps were not outside salespeople because they did not complete any sales, in several cases, it has reached the conclusion that pharma reps are exempt under the administrative exemption. Most recently, the Ninth Circuit held that, notwithstanding the fact that pharma reps cannot and do not consummate sales, their promotional activities are close enough to render them exempt under the outside sales exemption. The Supreme Court has now granted cert in the Ninth Circuit case to potentially resolve the issue.
The Department of Labor had submitted an Amicus Brief in support of the employees in both the Second and Ninth Circuit cases. While the Second Circuit relied on the DOL’s Brief in large part, reaching its conclusion that the pharma reps are non-exempt, the Ninth Circuit rejected the arguments in the Brief. Now, the stage is set for the Supreme Court to resolve the conflict between the circuits once and for all.
The 2 certified issues the Supreme Court is set to hear are:
(1) Whether deference is owed to the Secretary of Labor’s interpretation of the Fair Labor Standards Act’s outside sales exemption and related regulations; and (2) whether the Fair Labor Standards Act’s outside sales exemption applies to pharmaceutical sales representatives.
Visit the scotusblog to read the full decision below as well as the parties’ briefings to date in Christopher v. SmithKline Beecham Corp.