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

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.