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The court began its analysis by first explaining that the FLSA controls because New York’s overtime statute is defined and applied in the same manner as the FLSA. The court then explained how the FLSA exempts from its overtime requirements any employee whose primary duty is making sales, among other criteria. The court noted that although the determination of an employee’s primary duty must be based on all of the facts in a particular case, consideration is also given to certain “hallmark activities” such as whether the employee generates commissions for himself through his work; and the amount of work done away from the employer’s place of business.

In its analysis, the court first noted that the plaintiff’s case was almost identical to that of Chenensky v. New York Life Insurance Co., in which New York Life won summary judgment against a similarly situated plaintiff – although not a registered representative – whose primary duty was sales. The court declined to distinguish Gold’s case from Chenensky on this fact, declaring that “the fact that Gold’s employment is subject to certain regulatory requirements does not mean that compliance with the regulations is his primary duty under FLSA.” In other words, compliance with the FINRA regulations “[did] not convert a sales position into an advisory one.”

The court next highlighted the fact that the Gold had been paid solely on commission, received no compensation for pure financial advice in the absence of a sale, and consistently followed his employer’s six-step “Sales Cycle,” which involved mandated sales practices such as prospecting and closing the sale. In response, Gold cited case law in which courts found that a registered representative’s primary duty was something other than sales. The Gold court, however, distinguished these cases as inapplicable because, among other things, the FLSA’s “outside sales exemption” was not at issue in any of the cases. The court was similarly unpersuaded by Gold’s reliance on Department of Labor (DOL) opinion letters, one of which stated that a registered representative may qualify for the FLSA’s administrative exemption. Indeed, the court rejected the DOL letters as non-binding, and further held that because Gold’s duties did not involve managerial or promotional responsibilities, the FLSA’s administrative exemption did not apply.

Gold’s other claims, involving violations of New York’s minimum wage law and allegations of illegal deductions, either survived summary judgment or were allowed to move forward by the court. The case is significant in that it further solidifies insurance agents whose primary duty is sales as subject to the “outside salesman” exemption of the FLSA. The case also provides further support for application of the exemption even where an insurance agent has taken on arguably non-sales duties, such as due diligence, in order to comply with FINRA’s regulations.

Photo credit: Ed Bock Photography, Inc.

Next, the court considered whether the prohibition of a class action voided the agreement. Notably, the Fourth Circuit in Adkins v. Labor Ready, Inc. had already addressed the issue and held that an arbitration agreement precluding class actions, and specifically a collective action under the FLSA, is not per se unlawful in light of the clear federal directive in support of arbitration. In this case, however, the court found that, in conjunction with the fee splitting provision, it would likely be that “no individual suits” would be brought except as a collective action under the FLSA.

Lastly, the court found that the provision truncating all statutes of limitations to one year would prevent Plaintiffs from vindicating their statutory rights, although the court recognized that some limitation periods may be shortened by agreement. Relying on Ninth Circuit precedent in Davis v. O’Melveny & Myers, the court held that a strict one year limitation period for employment-related statutory claims is oppressive in an arbitration context.

This case suggests that an employer may include one of the above provisions in an arbitration agreement, but not all three. In addition, the court left open the question of whether parties could agree to a two-year statute of limitations on some claims. 

Photo credit: Logan Simmons
 

The U.S. District Court for the Northern District of Illinois, Eastern Division, granted conditional certification on the plaintiffs’ FLSA claims, but then denied the plaintiffs Fed. R. Civ. P. 23(b)(3) certification on their supplemental state-law claims based on the court’s finding that FLSA collective actions and state law class actions cannot be litigated together. The court reasoned that the plaintiffs could not satisfy Fed. R. Civ. P. 23(b)(3)’s superiority requirement because the FLSA collective action was now certified and proceeding. According to the court, allowing both types of actions to proceed would mean that some of the individuals included as part of the state-law classes (those who did nothing) would be excluded from the FLSA collective action (for failing to opt-in). The court thought that such a result would undermine congressional intent as expressed in the FLSA.

On appeal, the Seventh Circuit disagreed. First, the court found no categorical rule or case law against certifying a state-law class action in the same proceeding as an FLSA collective action. In addition, the court pointed to the familiar savings clause in the FLSA which states that no provision of the FLSA shall excuse non-compliance with any federal or state law establishing a higher minimum wage or a shorter maximum workweek. In other words, both FLSA collective actions and state-law class actions can peacefully co-exist in the same lawsuit.

On the issue of how to notify potential class members when both types of representative actions are certified (thus requiring opt-in and opt-out notices), the court acknowledged how the potential for confusion was a valid case-management consideration under Rule 23(b)(3)(D), but nonetheless failed to see how this notice problem was “any worse” than numerous other problems district courts face in managing class actions. According to the court:

It does not seem like too much to require potential participants to make two binary choices: (1) decide whether to opt in and participate in the federal action; (2) decide whether to opt out and not participate in the state-law claims.

Finally, the court noted that if an FLSA collective action were allowed to proceed separately in federal court while the state-law class action proceeded in state court, the situation would be much worse as the two courts would send uncoordinated notices to the putative classes. As a general rule, the court explained, it is preferable to have notice issued from a single court and in a unified proceeding.

This entry was written by Milton Castro.

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.