Wage & Hour Counsel : Wage & Hour Lawyer & Attorney : Littler Mendelson Law Firm : Employment Law, Labor Relations

Background

Plaintiffs are former pharmaceutical sales representatives (“PSRs”) for Alpharma, Inc., a manufacturer of pain medication that is now owned by King Pharmaceuticals. On July 10, 2007, the plaintiffs filed a complaint alleging they are due unpaid wages and overtime pursuant to the FLSA. Thereafter, on March 24, 2009, the court granted Alpharma, Inc.’s motion to stay the proceedings pending the outcome of Smith v. Johnson & Johnson in the Third Circuit Court of Appeals. Following the Third Circuit’s decision in Smith, Alpharma filed a motion for summary judgment before the instant court.

Analysis

The court held that the former PSRs qualify for the administrative exemption and analyzed the three-prong test that the Secretary of Labor sets forth in the administrative regulations. Under the test, an administrative employee must (1) make no less than $455 per week; (2) perform “non-manual work directly related to the management or general business operations of the employer;” and (3) exercise sufficient “discretion and independent judgment with respect to matters of significance.”

With the weekly salary requirement conceded by the parties, the court held that the second prong of the administrative exemption test was met, reasoning that the PSRs were involved in “marketing” and “promoting sales.” The court recognized that federal statutes and regulations prohibit the sale of Alpharma’s prescription medication directly to the public. The PSRs “called on doctors and pharmacies to encourage them to prescribe or stock Alpharma’s products over the products of its competitors.”

Concerning the third prong, the court further examined federal regulations defining the exercise of discretion and independent judgment as involving “the comparison and evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered.”

Alpharma relied heavily on the Third Circuit’s holding in Smith that “a pharmaceutical sales representative was not entitled to overtime pay because she qualified for the administrative exemption under the FLSA.” The district court noted that the plaintiff in Smith “described herself as ‘the manager of her own business who could run her own territory as she saw fit.’”

The court stated that “the facts in Smith are startlingly similar to the case at bar.” The court identified the following similarities: the employer gave Smith a list of target doctors including “high-priority” doctors, set a minimum number of doctors to visit per-day, permitted Smith to determine the order of doctor visits each day, provided Smith with a prepared “message,” allowed Smith “some discretion when deciding how to approach the conversation,” provided Smith with visual aids and did not allow her to use other aids.

The PSRs here worked alone, developed business plans, decided their “routing” (i.e., when and where to travel), and determined the doctors to meet with each day “in order to effectuate the most business.” The court stated that the PSRs also had discretion to decide “how to approach the physician.”

On the other hand, the plaintiffs characterized Alpharma’s PSR supervisors as “micro managers,” and argued that the PSR in Smith was more of a “freelancer.” The plaintiffs also urged the court to examine the full list of factors set forth in the regulations for determining “whether or not an employee exercises the requisite discretion and judgment to fit within the exemption.”

The court reasoned that the plaintiffs satisfied the same two factors as the plaintiff in Smith. First, the court noted that the PSRs’ work “affects business operations to a substantial degree.” Second, the court stated that the PSRs “are ‘involved in planning long-or short-term business objectives’ related to the marketing of their products within their territories.”

In addition to satisfaction of these two factors, the court stated that its conclusions were “buttressed by the plaintiffs’ duties to write reports and business plans to determine where their business was coming from, to detect trends in the sales of the drug, and to generate ideas on how to grow the business.”

The plaintiffs submitted supplemental submissions to direct the court’s attention to other PSR misclassification cases: Jirak v. Abbott Laboratories, Inc. and In re Novartis Wage and Hour Litigation. The court found it unnecessary to discuss these cases in light of the Third Circuit’s decision in Smith and in a subsequent nonprecedential opinion.

This entry was written by Michael Harvey.

When the case was considered by the district court, it dismissed the plaintiffs’ claims, finding the Reps were exempt employees under both the “outside sales” and “administrative” exemptions set forth in the FLSA. Analyzing first the outside sales exemption, the district court concluded that even though the Reps “may not ‘sell’” in a “technical[ ]” sense, they do “make sales in the sense that sales are made in the pharmaceutical industry” and therefore they meet the “spirit and the letter” of the outside sales exemption. The district court also found that the Reps meet the administrative exemption, because they “exercise discretion and independent judgment with respect to matters of significance” when they meet with physicians, provide them with information about the company’s products, and attempt to get commitments to prescribe the products. The Second Circuit reversed and held that the Reps do not meet either exemption.

Outside Sales Exemption

The Second Circuit concluded that the Novartis Reps do not meet the requirements of the outside sales exemption because they do not “make sales.” The court relied heavily on the Secretary of Labor’s amicus curiae position that a “sale” requires an exchange of consideration between buyer and seller and that, at best, Reps simply seek a positive affirmation from physicians that they will prescribe Novartis’s products in the future.

Although Novartis argued that the preamble to the regulations accompanying the FLSA provides that “commitments to buy” may constitute “making sales” under the exemption, the court rejected the argument as applied to this case. It held that “[t]he type of ‘commitment’ the Reps seek and sometimes receive from physicians is not a commitment ‘to buy’ and is not even a binding commitment to prescribe.”

Administrative Exemption

The plaintiffs also challenged the application of the administrative exemption based on the degree of discretion the Novartis Reps have in the performance of their duties. The Second Circuit again deferred to the Secretary of Labor’s interpretation of the regulations and her position regarding their application to the facts of the case. It noted that, despite the importance of the Reps’ efforts to promote the company’s products, there was “no evidence in the record that the Reps have any authority to formulate, affect, interpret, or implement Novartis’s management policies or its operating practices, or that they are involved in planning Novartis’s long-term or short-term business objectives, or that they carry out major assignments in conducting the operations of Novartis’s business, or that they have any authority to commit Novartis in matters that have significant financial impact.” Instead, the Second Circuit accepted the plaintiffs’ claim that they do “low-level discretionless marketing work, strictly controlled by Novartis” and concluded that they did not exercise sufficient discretion and independent judgment to satisfy the administrative exemption. 

This entry was written by Lori Alexander, Michael Harvey, and Theresa Waugh.

¹ On the same day the In re Novartis ruling was issued (July 6, 2010), the Second Circuit also issued a summary order in Kuzinski v. Schering Corp., 2d Cir. No. 09-1945-cv, affirming the district court’s denial of summary judgment in a similar case.

The plaintiffs requested the court take judicial notice of six state and federal court decisions which granted motions for class certification, and the defendant requested the court take judicial notice of two federal court cases denying class certification. The court granted the requests, but ultimately relied on two different federal court decisions: Vinole v. Countrywide Home Loans, 571 F.3d 935 (9th Cir. 2009) and In re Wells Fargo Home Mortgage, 571 F.3d 953 (9th Cir. 2009). In Vinole, the appellant sought to represent a class of external home loan consultants on the basis that the class was misclassified as exempt under the outside sales exemption. In Wells Fargo, the appellants were home mortgage consultants who claimed they were misclassified as administrative and outside salespersons.

In both cases, the Ninth Circuit court found that denial of class certification was proper because individual, not common, issues were likely to predominate. The court specifically noted that the issue as to an employee’s exempt or non-exempt status requires an individualized analysis of the way each employee actually spends his/her time, and not simply a review of the employer’s job description. Likewise, the court concluded that a defendant’s uniform exemption policy may not be used to satisfy predominance. The fact that an employer may classify a group of employees as exempt does not warrant a rule in favor of class certification given the necessity for individualized analyses.

In this case, the plaintiffs attempted to establish predominance by relying on the defendant’s staffing models and requirements for the position. The court noted that while the defendant’s staffing models and job requirements may prove susceptible to common proof, they do not establish predominance. Even if the defendant had some expectation based on staffing models as to how the branch managers would perform their daily tasks, the court concluded that this does not nullify the need for individualized inquiries as to how the branch managers actually spent their time. Citing Wells Fargo, the court noted that in wage and hour disputes where a defendant claims exemptions, like the administrative and outside salesperson exemptions, individualized inquiries about the actual hours worked, percentage of exempt versus non-exempt work performed, particular job experiences, and other inquiries are critical.

The court also pointed out that the plaintiffs’ own arguments weighed against class certification. The plaintiffs contended that the defendant had no expectation as to how branch managers met their goals, treated them as owners of their individual branches, and gave them nearly limitless discretion as to how to achieve company goals. The court noted that with substantial discretion as to how to operate one’s branch comes the likelihood of substantial differences—rather than common proof—as to how each purported class member spends his/her workday. Because the staffing models were recommendations as to how branch managers should perform their tasks and they were given nearly limitless discretion, the court concluded that individual issues are likely to predominate. Having failed to meet their burden under Rule 23(b), the plaintiffs’ motion for class certification was denied.

This blog entry was written by Michele Z. Stevenson.

In Administrator’s Interpretation No. 2010-1, the DOL focused on the “production versus administrative” dichotomy in determining that mortgage loan officers are production workers whose primary duty is making sales, as opposed to administrative workers whose work is directly related to the management or general business operations of their employer or their employer’s customers. See 29 C.F.R. § 541.200.

The DOL relied on the following factors in reaching its conclusion:

• The primary job duties of mortgage loan officers – including collecting financial information from customers, entering it into the computer program to determine what particular loan products might be available to that customer, and explaining the terms of the available options and the pros and cons of each option, so that a sale can be made – constitute the production work of an employer engaged in selling or brokering mortgage loan products;
• Mortgage loan officers are paid primarily by commissions;
• Employers often train their mortgage loan officers in sales techniques and evaluate their performance on the basis of their sales volume;
• Many employers defend against FLSA lawsuits brought by mortgage loan officers by arguing that they are exempt as outside sales employees, thus conceding that their primary duty is sales; and
• Courts have repeatedly held that mortgage loan officers who work inside their employer’s place of business have a primary duty of sales.

The Wage and Hour Division announced that its new Administrator Interpretations “will set forth a general interpretation of the law and regulations, applicable across-the-board to all those affected by the provision in issue. Guidance in this form will be useful in clarifying the law as it relates to an entire industry, a category of employees, or to all employees.” Although the DOL will continue to respond to requests for opinion letters, such responses will be limited to providing references to relevant statutes, regulations, interpretations and cases and will no longer include an analysis of the specific facts presented.

This entry was written by Stephanie L. Hankin.

In Re Novartis is a consolidated class action brought by Pharmaceutical Sales Representatives (“Reps”) from California, New York and other states against Novartis Pharmaceutical Corporation, one of the largest drug manufacturers in the United States. Claiming that they were misclassified as exempt employees, the Reps seek overtime wages for hours worked in excess of 40 hours in a workweek.

The Meaning of “Sales”

In the first of two justifications for its defense judgment, the district court held that Novartis Reps met the requirements of the outside salesperson exemption. Under Section 13(a)(1) of the FLSA, “any employee employed . . . in the capacity of outside salesman” is exempt from the overtime pay requirement. 29 U.S.C. 213(a)(1). DOL regulations define “outside salesman” as any employee “whose primary duty is making sales” while “customarily and regularly engaged away from the employer’s place or places of business in performing such duty.” 29 C.F.R. § 541.500(A).

The parties do not dispute that Novartis Reps were employed “away from the employer’s place of business.” The real issue before the Second Circuit is the meaning of “sales.” The DOL’s brief draws a fine line distinction between the alleged promotional activities of the Reps and actual sales under the FLSA. The latter occurs only when consideration is paid by the client or customer, according to the DOL. Reps do join Novartis’ “sales force” and receive training in both sales techniques and pharmacology. However, FDA regulations bar Reps from selling drugs directly to physicians. Instead, Reps seek to persuade physicians to write prescriptions for Novartis products, ideally resulting in a “close,” i.e., obtaining a physician’s verbal commitment to prescribe Novartis drugs when appropriate. As part of Novartis’ incentive program, between 15% and 25% of the Reps’ salary comes from commission on the number of prescriptions written by physicians within the Reps’ territory. The average salary after incentives is $91,500. Though the DOL admits that the Reps’ duties “bear some of the indicia of sales,” it nevertheless objects to their classification as outside salespersons. In short, unless the Reps actually “make sales,” they do not qualify for the exemption, according to the DOL.

The Degree of “Discretion”

The lower court also held that that “even if [the Reps] are not outside salespersons, they are administrative employees and are still exempt.” In Re Novartis, 593 F. Supp. 2d at 640. The “administrative employee” exemption applies only to employees who exercise discretion and independent judgment with respect to matters of significance. 29 C.F.R. § 541.200(a)(3).

In challenging the lower court’s ruling on the “administrative employee” exemption, the DOL urges the Second Circuit to interpret “discretion and independent judgment . . . in the light of all the facts involved in the particular employment situation in which the question arises.” In so doing, the DOL stresses that Reps must follow a prepared script when contacting target physicians, and they are prohibited from deviating from the “core message” in the marketing pitch. Novartis limits dissemination methods to certain pre-approved materials, including drug samples, pamphlets, clinical studies, and visual aids. When presented with the same facts, however, the lower court criticized the plaintiff Reps for characterizing themselves as “mere ‘robots’ or ‘automatons.’” The lower court found that the Reps exercise sufficient discretion in deploying the core messages and supporting materials. For instance, Reps tailor their presentations to the physician’s schedule, patient base, prescribing habits, and even personality. They also set their own daily call schedules, and use personal entertainment budgets to host informational events for physicians on their target lists.

The DOL argues that the district court’s ruling on the administrative exemption is “unpersuasive in its attempt to ‘back-fit’ the FLSA regulations into the pharmaceutical industry’s practices.” However, as noted by the lower court, “[c]ourts routinely hold that employees may exercise discretion and independent judgment, even when they carry out their duties within the confines of a highly regulated industry.”

This entry was written by Michael Harvey.

Photo credit: Tom Varco

Quicken Loans also moved for summary judgment on its affirmative defense under 29 U.S.C. § 259, which provides that “no employer shall be subject to any liability” under the FLSA if the employer proves that it relied upon a written ruling of the Wage and Hour Administrator with respect to the challenged compensation practice. Here, the magistrate judge found no issue of fact. Rather, based upon the undisputed record, Quicken Loans evaluated the duties and responsibilities of its loan consultants after the issuance of the September 2006 DOL opinion letter, compared these duties to the description of the mortgage loan officers that were the subject of the opinion, and reasonably relied upon the DOL’s conclusion that such employees qualified for the administrative exemption. Such reasonable reliance barred the plaintiffs from any recovery after September 6, 2006, the date that reliance upon the opinion letter was established, even if, ultimately, a jury determined that the exemption does not apply. This decision, if adopted by the Article III judge assigned to the case, underscores the significant impact that the good faith defenses may have in wage and hour litigation.

This blog entry was authored by Andrew Voss.
 

With respect to the administrative exemption, the DOL noted that insurance agents responsible for advising clients on various insurance and financial products best-suited to the client’s specific needs, goals and risk tolerance—as opposed to simply making sales—could qualify for the exemption. Promoting business and marketing different financial products constitute “servicing the employer’s business,” the DOL found. By analyzing client information and developing individualized advice, the agents exercise discretion and independent judgment, one of the hallmarks of the administrative exemption.

While this opinion letter is good news for insurance companies, it must be emphasized that the courts will continue to evaluate exemptions to the FLSA’s overtime provisions narrowly and based on the specific facts of each case.

This entry was authored by Shannon Patton.

The court accepted Aon’s argument that the duties described in its claims adjuster job description qualify as exempt work. The court emphasized that there was no indication in the job description that these significant activities were closely supervised and these activities “entail[] specialized training, experience and knowledge.”

A job description may—or may not—accurately describe the work performed by any group of persons covered by that job description. But Aon succeeded in showing—based primarily on testimony of the class representatives themselves—that the work actually performed by the adjusters also constituted non-manual office work “directly related to the general business operations” of Aon/Cambridge and its customers. Of significance to the court were the class representatives’ admission that their decisions whether to accept a workers’ compensation claim directly affected the amount of money expended by their clients. Moreover, the adjuster’s responsibility to set reserves for each claim required clients to set aside cash to cover these potential liabilities, and in the aggregate, claims adjusters established reserves as high as $50 million dollars. The failure to set adequate reserves properly can have dire consequences for clients, including causing insolvency and even bankruptcy. The court rejected plaintiffs’ contention that this reserve-setting process did not fulfill a critical role for clients in discharging the client’s obligation to comply with the state workers’ compensation laws.

The court also found that the adjusters “customarily and regularly” exercised discretion and independent judgment in handling workers compensation and other liability claims. The “relative uniformity” of the testimony in describing the spectrum of issues impressed the court. While the adjusters argued that the company’s “best practices manual” curtailed their exercise of independent judgment or discretion, Judge Sabraw agreed with Aon that the manual was merely a “guideline” or “resource” for adjusters, not “a rigid template for how to handle every claim.”

Plaintiffs’ argument that these adjusters were analogous to non-exempt “inspectors” did not carry the day either. The court found that adjusting workers’ compensation claims requires far more discretion than that exercised by inspectors, noting that one class member admitted that 75 to 80 percent of her daily decisions were made without supervision, another plaintiff conceded that the process “is not rote work,” and a third noted that different claims adjusters can reach different conclusions evaluating the same medical evidence.

Although the adjusters showed they were required to obtain supervisor approval for certain decisions such as denying a claim or setting a reserve above the adjuster’s authority level, the court next determined that the adjuster operated under only general supervision. Critical to the court’s decision was its conclusion that adjusters were largely unsupervised and free to work independently. Once again, key admissions from plaintiffs themselves were critical to Aon’s success, such as one adjuster’s observation that, “I don’t need someone looking over my shoulder for me to get my job done.” Further, adjusters needed specialized education because each must pass a state-mandated certification test, obtain continuing education credits, and stay current with changes in the laws impacting workers’ compensation coverage.

Finally, to qualify as exempt, Aon/Cambridge had to prove that the adjusters spent more than one-half of their work time engaged in exempt duties. According to Judge Sabraw, little evidence was offered at trial to show that class members spent anything approaching less than half of their time performing the exempt duties outlined in the company’s job description. The class representatives themselves admitted to performing exempt duties as often as 100 percent of the time.

Since there was no dispute that the adjusters were paid well above twice the minimum wage, the court concluded that the class as a whole met each of the criteria for the administrative exemption, and that Cambridge did not violate minimum wage laws, nor engage in any unlawful or unfair conduct proscribed by Business and Professions Code section 17200.

Interestingly, the court nevertheless provided its analysis of plaintiffs’ request for the equitable remedy of restitution, apparently to avoid a retrial should plaintiffs overturn the judgment on appeal. If the plaintiffs were to prevail on the issue of exempt status, then the court found the statistical evidence offered by competing experts sufficient to award lost overtime of 4.35 hours per week to the class. Sorting through the evidence based on depositions of 187 class members, the court found more reliable the testimony of current as opposed to former adjusters, noting that former adjusters reported nearly twice the weekly overtime as current adjusters (8.23 hours compared to 4.35 hours). The court commented that the farther back in time the adjuster was asked to estimate the amount of overtime worked, the higher the overtime hours reported. The court thus opined that if the plaintiffs were to prevail on liability, the court would accept the average of 4.35 overtime hours per week in order to calculate lost overtime, albeit calibrated to reflect different pay rates at different times.

Aon’s victory comes after a long legal battle. The first trial before a jury in 2005 resulted in a mistrial. Plaintiffs already have announced their intention to appeal Judge Sabraw’s decision. Whatever the final outcome, this case illustrates that insurance companies and other employers can establish the applicability of California’s administrative exemption, even when employees receive general guidance from manuals and supervisors.

Alison Hightower authored this blog entry.