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.

In Collins, drivers working for a wholesale importer and distributor of wine picked up the wine from its employer’s warehouse in Chicago and delivered the wine to retail stores in Chicago and other areas of Illinois. Although the employees never made deliveries outside of Illinois, their employer controlled the wine from the time its independent contractors picked up the wine from the state or country of origin until the time its drivers (the plaintiffs) ultimately delivered the wine to a retail outlet in Illinois. The wine did not undergo any alteration on its trip from the vineyard to a retail store, nor was it subject to any processing, deliberate aging, adding of preservatives, or re-labeling. Rather, “[w]hen the wine arrives at the warehouse, it is taken off the shrink-wrapped pallets on which it is delivered and shelved in the warehouse, period.”

In concluding that the drivers were engaged in interstate commerce bringing them within the Motor Carrier Act exemption from overtime, the Seventh Circuit found that the drivers’ delivery of wine exclusively within Illinois amounted to the last segment of an uninterrupted single interstate shipment originating from the locations where the wine had been produced. According to the Seventh Circuit:

“It seems to us that when a shipper transports his product across state lines for sale by him to customers in the destination state, and the product undergoes no alteration during its journey to the shipper’s customer, and interruptions in the journey that occur in the destination state are no more than the normal stops or stages that are common in interstate sales, such as temporary warehousing, the entire journey should be regarded as having taken place in interstate commerce within the meaning of the Motor Carrier Act’s exemption from the [FLSA]."

As a result, the court affirmed the district court's holding that the drivers were engaged in interstate commerce and, therefore, exempt from overtime under the FLSA.

While at first blush the decision in Collins appears to be favorable to employers, the Seventh Circuit’s conclusion that the drivers were engaged in interstate commerce was limited to the facts before it. Accordingly, employers with drivers who deliver goods within a single state must evaluate the overall process for delivery of goods from start to finish before concluding that the Motor Carrier Act exemption applies.

This entry was written by Jennifer L. Mora.

Photo credit: MobiusDaXter
 

In addition, the proposed regulations would “modernize” certain recordkeeping requirements by allowing for “automated and electronic recordkeeping systems and methods to take the place of mandatory paper records that are currently required in some instances for employees” who work from home.

The DOL anticipates issuing a notice of proposed rulemaking in August of 2010.

This entry was written by Christopher Kaczmarek.

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

Upon the termination of her employment with Sears, Ericka Brown was presented with a separation agreement, which she voluntarily elected to sign.  That agreement entitled her to a severance package, and also precluded her from bringing certain waivable claims against the company.  Significantly, the agreement also required her to waive her right to bring, or participate in, a class action relating to her employment with the company.  Despite this agreement, Brown, in her lawsuit against the company, sought to recoup allegedly unpaid wages under a variety of state statutory and common law legal theories, and sought to proceed by way of both a Federal Rule of Civil Procedure 23 class action and a Federal Fair Labor Standards Act (FLSA) collective action.

The court agreed with Sears that even though employees such as Brown cannot waive the right to assert individual FLSA rights—including alleged entitlement to minimum wage, overtime and the recovery of liquidated damages—they can waive other causes of action for alleged non-payment of wages under other laws, including state claims for breach of contract, as well as the right to bring  any variety of class action (including an FLSA collective action) on behalf of others.  Specifically, the court reasoned that the waiver of the ability to bring an action on behalf of others does not diminish an employee’s ability to assert her own rights under the FLSA. This ruling provides protection to employers who have, for valuable consideration, procured these waivers.

This blog entry was authored by Laurent Badoux.

In addition to the FIL Training guide, the Department also produced copies of the handwritten employee interview summaries prepared by the investigator on the Department’s “Employee Personal Interview Statement” (WH-31) form. Together, these materials provide a fascinating glimpse into the Department’s internal thinking and strategies on how to conduct employee interviews during FLSA investigations. Some of the key points emphasized in the FIL Training guide include:

• The importance of including the Department’s legal counsel, the Solicitor of Labor (SOL), in the investigation process and consulting with the SOL on “the kind and amount of information needed from interviews in order to resolve the issues presented.” In other words, employers should always assume that the Department is actively consulting with its attorney and preparing for potential litigation during the course of an FLSA investigation.

• The method for determining how many employee interviews should be conducted by the investigator in order to produce a “representative sample.” As explained in the FIL Training guide, with a “small number of affected employees (10 or less), it is reasonable to interview all of them.” By contrast, the guide recommends that with a “large number of employees (100 or more), interview about 20%.”

• Specific suggestions on interview techniques and styles that Department investigators can use to put “an employee at ease” and facilitate “the free flow of pertinent information.”

• The Department’s preferences on interview locations and methods (“[p]ersonal face-to-face interviews are the best method,” while “[t]elephone interviews are acceptable” and “[m]ail interviews are the least desirable”).

• The suggested form and substance of the signed employee interview statements each investigator is required to prepare and obtain at the conclusion of employee interviews.

• The requirement that investigators “evaluate the demeanor, articulateness, self-confidence, and other appropriate characteristics of each witness,” and document that evaluation for future use by the SOL to “determine which employees will be the best witnesses” against the employer in any future litigation.

Each year the Department receives 25,000-30,000 new employee wage complaints under the FLSA. Although only about one percent of these complaints end up in court, the Department’s FIL Training guide shows that the Department conducts each investigation with the understanding that it may result in contested litigation. Given this policy, and the detailed training materials and methods used by the Department to prepare for the possibility of litigation, employers need to ensure that they devote the same time and effort to preparing their response to FLSA wage and hour investigations.

This blog entry was authored by Douglas E. Smith.
 

The court next determined that the plaintiffs’ activities – even though primarily intrastate in nature – constituted “interstate commerce” as that term is used in the MCA because they were part of the continuous stream of interstate travel. Specifically, ACLM’s airport-to-seaport routes “share a practical continuity of movement with the interstate or international travel of the cruise lines and their passengers ... [f]or cruise ship passengers arriving at the airport or seaport, ACLM’s shuttle rides would be part of the continuous stream of interstate travel that is their cruise vacation.” 2009 WL 2182419, at *6.

Finally, the court rejected the plaintiffs’ arguments for limiting the Secretary of Transportation’s jurisdiction over their work-related activities, concluding that: (1) neither the plain language of the MCA, nor the plain language of the FLSA, limit the Secretary of Transportation’s jurisdiction solely to transportation that actually crosses state lines; (2) the MCA’s “incidental-to-air” exemption, 49 U.S.C. § 13506(a)(8)(A), did not divest the Secretary of Transportation’s jurisdiction over ACLM with respect to regulation of maximum hours of work; and (3) to the extent a through-ticketing arrangement was required for ACLM’s airport-to-seaport routes to constitute interstate commerce, ACLM demonstrated that such an arrangement in fact existed.

This blog post was authored by Jeffrey Timmerman.

Employers should note that not all chefs and cooks may participate in tip-pooling arrangements. Only those who have regular customer contact may do so. Similarly, servers, bellhops, bus persons, counter persons and service bartenders may participate in tip-pooling arrangements. Dishwashers, for example, cannot participate in tip pools. Employers also should note the variations in state laws regulating tip-pooling arrangements. See, e.g., California Division of Labor Standards Enforcement Opinion Letter dated 9/8/05 (tip pool should include only “those employees who contribute in the chain of the service bargained by the patron,” and should exclude any supervisory employee “with the authority to hire or discharge any employee or supervise, direct, or control the acts of employees”).

This blog entry was authored by Tyler Paetkau.

In misclassification litigation under the FLSA, plaintiffs often argue that the foregoing “fluctuating workweek” method of calculating overtime should not be permitted. These plaintiffs contend that the “clear mutual understanding” required by § 778.114 must include an understanding that overtime premiums will be calculated using the “half-time” method. Of course, in misclassification cases, overtime was not paid at all, so the parties necessarily did not have any understanding as to how overtime premiums would be calculated. If the plaintiffs prevail on this argument, therefore, the “fluctuating workweek” method could never be used in misclassification cases, and plaintiffs in misclassification cases would be awarded overtime damages using the “time and one-half” method (pursuant to which their weekly salary would be divided by 40 hours or some other fixed number of hours, and the resulting hourly rate would be multiplied by 1.5 and then paid for all overtime hours).

The method used for calculating overtime can have a significant impact on the potential exposure in litigation. For example, if an employee was paid a weekly salary of $1,000, overtime liability for a week in which the employee worked 50 hours would be: (a) $100 using the “fluctuating workweek” method ($1,000 ÷ 50 x 0.5 x 10); but (b) $375 using the “time and one-half” method ($1,000 ÷ 40 x 1.5 x 10).

In Clements v. Serco, Inc. the Tenth Circuit held that in order to take advantage of the “fluctuating workweek” method of calculating overtime in a misclassification case, the employer must prove only that the parties had a “clear and mutual understanding” that the employees would be paid a fixed salary for all hours worked.530 F.3d 1224 (10th Cir. 2008).

The Clements decision provides some welcome relief to employers faced with misclassification litigation. But it also provides a valuable lesson for all employers. In order to establish the existence of a “clear and mutual understanding” that the employees would be paid a fixed salary for all hours worked, offer letters and other documentation regarding an exempt employee’s weekly salary should not suggest that the salary is compensation for a fixed number of hours per week or for a fixed weekly schedule. Rather, the documentation should confirm that the salary is intended to compensate the employee for all hours worked each workweek, whether many or few.

For more comprehensive coverage of this issue, see our article on Littler.com.

Robert Pritchard authored this blog entry.