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

Under the FLSA, compensation for overtime need not be provided to “any employee...in the capacity as an outside salesperson.” 29 U.S.C. § 213(a)(1). To qualify as an outside salesperson, (1) the employee’s “primary duty” must be “making sales” or “obtaining orders or contracts,” and (2) he or she must customarily and regularly be engaged away from the employer’s place of business in performing such duty. 29 C.F.R § 541.500(a). Both parties agreed that PSRs met the second requirement, so the only disputed issue was whether their primary duty was making sales.

The FLSA defines sales as “any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.” 29 U.S.C. § 203(k). Moreover, sales include “the transfer of title to tangible property, and in certain cases, of tangible and valuable evidences of intangible property.” 29 C.F.R. § 541.501(b). Whether an employee makes sales requires an objective analysis, and according to the U.S. Department of Labor (DOL) making sales includes “obtain[ing] a commitment to buy from the customer,” which resulted in the salesperson being “credited with the sale.” U.S. Department of Labor, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, 69 Fed. Reg. 22122, 22162 (Apr. 23, 2004). According to the court, under the DOL regulations, there is no requirement that commitments be binding. All that is required is that a sale be made “in some sense.”

In Christopher, the PSRs argued that they did not make sales because they did not consummate transactions or take orders. Instead, they claimed they merely promoted products. Moreover, PSRs contended their activities did not constitute sales because the U.S. Food and Drug Administration expressly prohibited pharmaceutical companies from selling directly to physicians or patients. According to the PSRs, sales only occurred between the pharmaceutical company and wholesalers.

The court noted that opinions differed among the federal courts whether PSRs made sales. A federal court in Connecticut concluded that PSRs did not qualify for the exemption because they could not sell, and physicians could not buy, products. Ruggeri v. Boehringer Ingelheim Pharms., Inc., 585 F. Supp. 2d 254, 268 (D. Conn. 2008). However, a court in New York held that PSRs were exempt because they were credited with sales when physicians wrote prescriptions. In re Novartis Wage & Hour Litigation, 593 F. Supp. 2d 637, 648 (S.D.N.Y. 2009) (on appeal to the United States Court of Appeals for the Second Circuit). To determine whether PSRs qualified as outside salespeople, the court in Christopher looked to the rationale behind the outside sales exemption and also examined the position in the context of the pharmaceutical industry.

According to the court, the characteristics of PSRs justified exemption. PSRs were compensated well above the federal minimum wage (up to $100,000 per year), received fringe benefits like incentive bonuses in lieu of overtime, were unsupervised, and had better opportunities for advancement than non-exempt employees. Additionally, the kind of work they performed was “difficult to standardize to any time frame and could not be easily spread to other workers after 40 hours in a week, making compliance with overtime provisions difficult.” (quoting U.S. Department of Labor, 69 Fed. Reg. at 22124.)

The court observed that although the FLSA was enacted prior to the development of the pharmaceutical sales industry, it was intentionally broad to “address a multiplicity of industries found in the national economy and accordingly provide flexibility in the definition of a ‘sale.’” Moreover, the industry’s unique nature, i.e., the prohibition of direct sales, shifted the focus of sales efforts from the consumer to the physician, thereby making “[a] PSR’s ultimate goal [the] close [of] an encounter with a physician by obtaining a non-binding commitment from the physician to prescribe the PSR’s assigned product.” PSRs worked longer and irregular hours to generate sales in their territory for which they received compensation in the form of bonuses. The court concluded that PSRs “plainly and unmistakably fit within the terms of the exemption” because they engaged in “the functional equivalent of an outside salesperson and to hold otherwise is to ignore reality in favor of form over substance.”

The exempt status of pharmaceutical sales representatives continues to be litigated in courts across the country, and the issue is not settled. In the Novartis appeal referenced above, the U.S. Department of Labor filed an amicus brief arguing that pharmaceutical sales representatives do not qualify for the “outside sales” exemption. 

This entry was written by Robert Pritchard.

¹ Note: In the decision, SmithKlineBeecham is spelled as SmithKleinBeecham, which is an error.

Image credit: Alan Smithee

The Sixth Circuit held that the deductions made by the employer were improper because they were not made to recover irregular salary advances or payments mistakenly made by the payroll department. Rather, the company reduced guaranteed pay under a purposeful, incentive-driven bonus compensation plan, which is not allowed under the FLSA.

The Court held that the Auer test was applicable for the pay periods occurring before August 23, 2004. Because the employer’s pre-August 23, 2004, compensation plan did more than create a theoretical possibility of deduction, but instead laid out a policy under which Life Time Fitness would make future deductions, the Court held that the company was liable to those plaintiffs employed and subject to the compensation plan from January 1, 2004 through August 23, 2004.

The Court upheld the lower court’s application of § 541.603 to the pay periods following August 23, 2004, and affirmed the district court’s ruling that because improper deductions were only made during three pay periods in November and December 2005, only plaintiffs who worked in the appropriate job classification during those three pay periods (in which improper deductions were made) were entitled to overtime compensation.

The Baden-Winterwood decision is significant because the Court recognized that under the revised Regulations, only actual improper deductions will violate the salary basis requirements under the FLSA. Now, instead of employers focusing on whether their policies provide for the possibility of improper deductions from exempt employees’ salaries, they need only ensure that no improper deductions are actually made from exempt employees’ pay to jeopardize the exemption during each pay period.

This blog entry was authored by Jamie Kitces.

More specifically, per the California Division of Labor Standards Enforcement’s Enforcement Policies and Interpretations Manual (DLSE Manual), production bonuses are those “based on a percentage of production or some formula other than a flat amount [which] can be computed and paid with the wages for the pay period to which the bonus is applicable.” Because such bonuses are earned during straight time as well as overtime hours, the “regular rate” for such a bonus is calculated by dividing the bonus by the total hours worked (including overtime hours) during the period to which the bonus applies. The overtime premium due on the bonus is then calculated multiplying one-half of the regular rate for the bonus by the number of overtime hours worked during the period in which the bonus was earned.

In contrast, where the bonus at issue is a flat sum, such as $300 for continuing to the end of the season, or $5for each day worked, the DLSE Manual indicates that the regular bonus rate is determined by dividing the bonus by the maximum legal regular hours (i.e., straight time hours) worked during the period to which the bonus applies. According to the DLSE, such flat sum bonuses are “not designed to be an incentive for increased production for each hour of work; but, instead [are] designed to insure that the employee remain[s] in the employ of the employer.” Thus, “to allow [such a] bonus to be calculated by dividing by the total (instead of the straight time hours) would encourage, rather than discourage, the use of overtime.” Consequently, the DLSE Manual states that the premium due on flat sum bonuses is 1.5 times the regular rate of the bonus for each overtime hour worked during the time period at issue.

The court in Marin v. Costco held that the portion of the DLSE Manual governing “flat sum” bonuses is a void regulation under the reasoning of Tidewater Marine Western, Inc. v. Bradshaw (1996) 14 Cal.4th 557. Specifically, that portion of the DLSE Manual is “a standard of general application interpreting the law the DLSE enforce[s],” and “not merely a restatement of prior agency decisions or advice letters.” Accordingly, it does not have the force of law.

The court then addressed the legality of the manner in which Costco was calculating overtime on the semi-annual bonus it was paying to its hourly employees. The bonus was paid each April and October to certain long-term employees and was calculated based upon the number of hours the individuals had worked during the six month period preceding the payout date. The maximum semi-annual base bonus amount varied from $2,000 for those with less than ten years of service to $3,500 for those with twenty or more years of service. To qualify for the maximum base bonus, the employee must have been paid for at least 1,000 hours in the six-month period preceding April 1 and October 1. Bonuses were prorated for those paid for less than 1,000 hours; the formula for the base bonus was thus hours paid up to 1,000/1,000 x maximum bonus amount.

Costco calculated the overtime owed on the bonus by dividing the employee’s maximum base bonus by the minimum number of paid hours required to achieve that maximum bonus (1,000). Using that number as the regular hourly bonus rate, Costco then multiplied the number of overtime hours worked during the bonus period by ½ of the regular bonus rate. In other words, Costco calculated overtime in accordance with the DLSE’s formula for production-based bonuses. Plaintiffs contended that the bonus was more akin to a flat sum bonus – such that Costco was required to calculate the regular bonus rate by dividing the base bonus by the number of straight time hours worked during the bonus period, and then multiply the number of overtime hours by 1.5 times the regular bonus rate.

The court concluded that the Costco bonus was a hybrid of the two types of bonuses identified by the DLSE. Because each hour worked up to the first 1,000 hours increased the amount of the bonus, Costco’s bonus functioned as a production bonus until the 1,000 hour threshold was met. As to hours worked after the 1,000 threshold, Costco’s bonus functioned like a flat sum bonus because the additional hours worked did not add to the amount of the bonus. Based on the DLSE’s position on the two types of bonuses, the court concluded that the Costco bonus did not “encourage imposition of overtime during the post-1,000 hour period in a way that would support the use of the DLSE’s flat sum bonus formula.” Accordingly, Costco was justified in using the production-bonus method of overtime calculation.

The court’s decision highlights how complicated it can be to correctly calculate bonus overtime under California law. However, the time and effort needed to get it right is time well spent since an employer that uses the wrong method for calculating bonus overtime is a prime candidate for a class action lawsuit that could lead to significant liability.

This blog entry was written by Marlene Muraco.