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

In Ross, the Seventh Circuit affirmed the district court’s pre-Dukes certification of a class of hourly bank employees who alleged off-the-clock work and a class of assistant branch managers who alleged they were misclassified as exempt. The court of appeals found that the Supreme Court’s discussion of the Rule 23(a)(2) commonality standard in Wal-Mart Stores, Inc. v. Dukes, 564 U.S. __, 131 S. Ct. 2541 (2011), a gender discrimination class action, did not change the commonality analysis in the case. Specifically, the Seventh Circuit distinguished Dukes as a case requiring individual inquiry into the discriminatory intent of thousands of managers, whereas it found that plaintiffs’ assertion of an “unofficial policy” of not paying for all time worked was susceptible to a “common answer that potentially drives the resolution of this litigation.” With respect to the exemption claims, the Seventh Circuit stated that “an individualized assessment of each [class member’s] job duties is not relevant to a claim that an unlawful company-wide policy exists to deny [class members] overtime pay.” Finally, the Seventh Circuit rejected the company’s argument that, in accordance with Dukes, it was entitled to present individualized affirmative defenses to the exemption claims, reasoning that Dukes only applied to claims for equitable relief under Rule 23(b)(2) and not claims for monetary relief under Rule 23(b)(3).

The employer sought a writ of certiorari on the following two questions: (1) Whether it was consistent with Dukes to hold that a defendant in a Rule 23(b)(3) class action has no right to raise statutory affirmative defenses on an individual basis if the class seeks only monetary relief; and (2) whether the Rule 23(a)(2) commonality standard is satisfied when a class claims the denial of overtime pay, without resolving whether dissimilarities in the class would preclude it from establishing liability on a class-wide basis.

Because the Seventh Circuit’s Ross decision did not expressly discuss the common proof of damages as an aspect of class acertification, it is unclear how Comcast will be applied on remand. However, the district court concluded that individualized damages issues were generally not relevant to certification decisions, stating: “Courts have not traditionally found individualized questions of damages to prevent class certification.” After Comcast, that may no longer be true.
 

 The WHD notes that this is the first time the agency has attempted to survey workers based on their knowledge of worker misclassification, and that federal law does not currently require employers to notify their workers of their employment status, the basis for their status determinations, or pay. One of the WHD’s long-term goals is to draft a rule that would amend an employer’s recordkeeping requirements under the Fair Labor Standards Act (FLSA) to provide employees with greater information about their employment status. According to information on this “Right-to-Know” proposal filed with the Office of Management and Budget (OMB), the purpose of this rule would be to:

enhance the transparency and disclosure to workers of their status as the employer's employee or some other status, such as an independent contractor, and if an employee, how their pay is computed. The Department also proposes to clarify that the mandatory manual preparation of "homeworker" handbooks applies only to employers of employees performing homework in the restricted industries.

Since this is a long-term rule-making proposition, it is unclear if the agency’s new proposed information collection request related to employee misclassification is a means of testing the necessity of a new rule.

The types of comments the WHD are seeking would address the necessity, burdensomeness, and clarity of the information that would be collected through this proposed worker classification survey. Comments on the proposal must be received on or before March 12, 2013, and contain the agency name and document number 2013-00389 or any other identifier. Comments may be submitted by email to: WHDPRAComments@dol.gov, or by mail or hand-delivery to: Division of Regulations, Legislation, and Interpretation, Wage and Hour, U.S. Department of Labor, Room S-3502, 200 Constitution Avenue, NW., Washington, DC 20210.

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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. 

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In reviewing the decertification motion, the court observed that the crux of the case was whether the MASMs were misclassified as exempt executive employees. Consequently, it was necessary for the court to review “the responsibilities and duties of a MASM” to determine whether that position qualified as exempt. The discovery conducted by Home Depot on this factor was critical to its successful decertification motion.

The court considered the MASMs’ deposition testimony, and concluded that “job responsibilities and duties varie[d] from MASM to MASM.” In reaching its conclusion, the court specifically relied upon the MASMs’ differing testimony about the following: (1) type of exempt work performed (directing and supervising employees, delegating work, planning work for employees, ordering inventory, and ensuring safety, security, and legal compliance within Home Depot stores); (2) authority over subordinate employees (hiring, promoting, evaluating, disciplining, and terminating employees); and (3) amount of time spent performing exempt work.

The court next identified three factors for consideration at the decertification stage: (1) disparate factual and employment settings; (2) defenses available to Home Depot; and, (3) fairness and procedural considerations. The court found all three factors for final collective action certification weighed in favor of decertification.

First, the court determined that there were substantial differences in the factual and employment settings of the MASMs, such that the court would be required to engage in numerous individualized determinations to discern whether each specific MASM qualified as an executive. The court also found that the plaintiffs could not rely on common proof evidence of Home Depot’s decision to classify all MASMs as exempt, Home Depot’s centralized corporate structure, the performance of non-exempt tasks by MASMs that overlapped with the responsibilities of non-exempt positions, or MASM compensation as compared to the nonexempt department supervisor’s compensation, because such factors did not establish the MASMs as similarly situated for FLSA purposes.

Second, the court recognized that Home Depot intended to present individualized evidence as to each MASM’s claims, and to raise contradictions between individual MASM’s written statements and deposition testimony. Third, the court noted its serious concerns about whether a collective action would be most efficient, and whether the court could “coherently manage” the collective action without prejudice to the parties, given Home Depot’s intention to explore individualized defenses. Accordingly, the court decertified the conditional collective action.

Finally, the court denied the MASMs’ request for subclasses for declaratory relief and training period claims. The court concluded that there was no authority supporting injunctive relief arising from Home Depot’s blanket policy of classifying all MASMs as exempt, without having first analyzed the appropriateness of the classification by testing the daily activities of the MASM position. In addition, the court noted that if the uniform classification of a position as exempt is not enough to establish similarly situated for FLSA purposes, as the court previously held in the decision, then it also does not support the creation of a subclass. The court also determined that the likelihood of dissimilarities during training would require an individualized case-by-case determination of whether each MASM was an executive during training.

This entry was written by Tracy Stott Pyles.

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Plaintiffs have urged courts to reject the “half time” method in favor of the so-called “time and a half” method, which results in much larger damages awards. The “time and a half” method divides the employee’s weekly salary by a fixed number of hours (typically 40) to determine a fixed weekly regular rate. The employee is then awarded 1.5 times that rate for all hours worked each week in excess of that fixed number.

While some district courts have accepted plaintiffs’ arguments in favor of the “time and a half” method, the Supreme Court’s decision not to disrupt the Seventh Circuit’s endorsement of the “half time” method was not surprising. Four other circuit courts and the U.S. Department of Labor have approved the “half time” method, and no circuit court has taken a contrary position. See Desmond v. PNGI Charles Town Gaming, LLC, 2011 U.S. App. LEXIS 702 (4th Cir. Jan. 14, 2011); Clements v. Serco, Inc., 530 F.3d 1224 (10th Cir. 2008); Valerio v. Putnam Assocs., Inc., 173 F.3d 35 (1st Cir. 1999); Blackmon v. Brookshire Grocery Co., 835 F.2d 1135 (5th Cir. 1988); Wage and Hour Opinion Letter, FLSA 2009-3 (Jan. 14, 2009).

This entry was written by Robert W. Pritchard.

The PSRs were supported in their appeal by an amicus filing by the U.S. Department of Labor, in which the Secretary argued that PSRs could not meet the “outside sales” exemption because they do not “make sales.” The DOL argued that as a result of the highly regulated nature of the pharmaceutical industry, PSRs merely promote pharmaceutical products to physicians, but those products are only thereafter purchased by a patient from a pharmacy. Thus, according to the DOL, the PSR does not “in any sense” make the sale of the product. In 2010, the Second Circuit accepted the DOL’s position and held that PSRs could not qualify for the outside sales exemption. In re Novartis Wage & Hour Litig., 611 F.3d 141 (2d Cir. 2010).

The Ninth Circuit was not impressed with this reasoning, concluding that it owed “no deference” to the DOL’s position. The court first expressed frustration that the DOL’s regulations merely paraphrased the statutory language (i.e., a “sale” means a “sale”) without setting forth a particular test for “sale” or instructing employers to look for indicia of sales. Then, the court criticized the DOL’s attempt “to draft a new interpretation of the FLSA’s language” in an amicus brief, noting that giving controlling deference to interpretations expressed for the first time in case-by-case amicus filings would effectively authorize the bypassing of the notice-and-comment rulemaking requirements of the Administrative Procedures Act.

After resoundingly rejecting the DOL’s approach to this issue, the court of appeals took the final step and held that the DOL’s position was plainly erroneous. The court viewed the term “sale” in the FLSA in a “commonsensical” fashion, noting that in light of the “structure and realities of the heavily regulated pharmaceutical industry” PSRs do, in fact, make sales. The court concluded that in this industry, the “sale” is the non-binding commitment from the physician to prescribe the PSR’s assigned product when medically appropriate. Thus, PSRs make “sales” and qualify for the outside sales exemption.

Finally, the court took note of the DOL’s “acquiescence” to the classification of PSRs as exempt for more than seventy years. Quoting Judge Posner, the court reasoned that while it is “possible for an entire industry to be in violation of the [FSLA] for a long time without the Labor Department noticing[, the] more plausible hypothesis is that the ... industry has been left alone” because DOL believed its practices were lawful. The court criticized that the DOL’s “about-face” position, “expressed only in ad hoc amicus filings, is not enough to overcome decades of DOL nonfeasance and the consistent message to employers that a salesman is someone who ‘in some sense’ sells.” The court concluded that the DOL’s argument “fails to account for industry customs and emphasizes formalism over practicality.”

The court’s holding regarding the status of PSRs under the FLSA’s outside sales exemption was significant in its own right. But the court’s strong rebuke of the DOL’s attempt to express its position on a critical wage and hour issue for the first time in an amicus filing may have far greater implications. Employers who have been concerned about the DOL’s recent policy shifts on a variety of issues, announced in amicus filings and “Administrator Interpretations,” now have an unlikely ally in the Ninth Circuit Court of Appeals. In light of the conflicting opinions on the exempt status of PSRs, however, it may only be a matter of time before the Supreme Court agrees to resolve this dispute once and for all.

This entry was written by Robert Pritchard.

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For the hired party to be “customarily engaged in an independently established trade, occupation, profession or business,” the hired party must: (1) possess the essential tools for the job, independent of the person for whom the services are performed; (2) realize a profit or loss as a result of performing the services; (3) perform the services through a business he owns, at least in part; (4) maintain an independent business location; (5) either perform similar services for another hiring party while meeting the first four requirements or credibly hold himself out as able to perform similar services; and (6) maintain individual liability insurance during the term of the contract of at least $50,000. Each criterion must be specifically met in order to classify a worker as an independent contractor.

Construction industry employers who misclassify workers and fail to provide coverage or make required payments or contributions under the Workers’ Compensation Act or the Unemployment Compensation Law may be penalized with fines or incarceration. Officers and agents of those employers, and those who intentionally contract with such an employer knowing that it intends to misclassify workers in violation of the Act, are subject to the same penalties. The Act further prohibits retaliation against whistleblowers.

The law goes into effect on February 11, 2011. Before that time companies engaged in construction should carefully review their arrangements with independent contractors to ensure they comply with the requirements of the law.

This entry was written by Thomas Benjamin Huggett and Matthew J. Hank.

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Employers who willfully violate the law are subject to civil penalties of up to $2,500 for the first violation and up to $5,000 for each subsequent violation within a five year period. This penalty may be assessed for each worker who is misclassified. Additionally, employers who violate the law may be guilty of a criminal misdemeanor, and subject to imprisonment for up to 30 days or a fine up to $25,000 for the first offense, or imprisonment for up to 60 days or a fine up to $50,000 for a subsequent offense. If the employer is a corporation, any officer or shareholder who owns or controls 10% or more of the corporation and who knowingly allows a violation of the law, may also be subject to civil and/or criminal liability. The new law also prohibits retaliation and requires a notice posting. The law explicitly states that violators may be subject to additional penalties for the misclassification of a worker with regard to unemployment compensation insurance, workers’ compensation insurance, or business, corporate, or personal income taxes.

This entry was written by Adam Malik.

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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 bill also authorizes the DWD to require an employer to provide proof of maintaining proper employee records, including wage and hour information, and sufficient worker's compensation coverage for its employees. Failure to provide the requested information may result in the DWD serving a notice on the employer of the DWD's intent to issue an order requiring the employer to stop work at the locations specified in the notice. The employer will then have three business days to provide the requested information. Failure to do so may result in the issuance of an order requiring the employer to stop work at the location identified in the order. The employer may appeal the order.

The second piece of legislation -- Assembly Bill 929 -- provides that employers engaged in the painting or drywall finishing of buildings or other structures who willfully misclassify or attempt to misclassify employees, with the intent to evade the unemployment insurance laws, worker’s compensation laws, income tax laws or discrimination laws, shall be fined $25,000 for each violation. This bill amends a current law providing the same penalty for willful misclassifications in other trades in the construction industry. The DWD is required to promulgate rules defining what constitutes willful misclassification of an employee.

This entry was written by Jennifer Ciralsky.

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.

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.

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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

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.