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

Under section 3(k) of the FLSA, a “sale” includes “any sale, exchange, contract to sell, consignment for sale, shipment for sale or other disposition.” The DOL’s regulations elaborate that sales “include the transfer of title to tangible property, and in certain cases, of tangible and valuable evidences of intangible property.”

Another relevant DOL regulation distinguishes sales work from “promotion work.” Under the regulations, promotion work is a type of activity:

often performed by persons who make sales, which may or may not be exempt outside sales work, depending upon the circumstances under which it is performed. Promotional work that is actually performed incidental to and in conjunction with an employee’s own outside sales or solicitations is exempt work. On the other hand, promotional work that is incidental to sales made, or to be made, by someone else is not exempt outside sales work. An employee who does not satisfy the requirements of this subpart may still qualify as an exempt employee under other subparts of this rule.

There has been a split among the courts, most notably the Ninth and Second Circuits, as to whether pharmaceutical representatives’ activities constitute sales because PSRs are prohibited by law from directly selling pharmaceuticals to physicians. The DOL has consistently taken the position that PSRs do not qualify for the outside sales exemption because they do not transfer ownership or property. The Second Circuit relied heavily on and agreed with the DOL’s interpretation and assessment in a 2010 decision.

In contrast, in Christopher v. SmithKline Beecham Corp., the Ninth Circuit declined to give deference to the DOL’s “current interpretation of the regulations.” In addition to noting the district court’s refusal to consider the DOL’s interpretation because it was “inconsistent with the statutory language and its prior pronouncements, [and] [] also def[ying] common sense," the Ninth Circuit reviewed prior Supreme Court decisions on the issue and stated, among other things, that the Secretary’s interpretation of an unambiguous statute by “an opinion letter, enforcement guidelines, or the like . . . is merely ‘entitled to respect’ to the extent the interpretation has the ‘power to persuade’ the court.”

The DOL’s amicus brief did not persuade the Ninth Circuit, which concluded that PSRs did, in fact, qualify for the outside sales exemption. Specifically, the Ninth Circuit reasoned that:

Plaintiffs' contention that they do not "sell" to doctors ignores the structure and realities of the heavily regulated pharmaceutical industry. It is undisputed that federal law prohibits pharmaceutical manufacturers from directly selling prescription medications to patients. Plaintiffs suggest that despite being hired for their sales experience, being trained in sales methods, encouraging physicians to prescribe their products, and receiving commission-based compensation tied to sales, their job cannot "in some sense" be called selling. This view ignores the reality of the nature of the work of detailers, as it has been carried out for decades.

As for the DOL’s distinction between “selling” and “promoting,” the appellate court stated that such a distinction “is only meaningful if the employee does not engage in any activities that constitute ‘selling’ under the Act.” The court further reasoned that:

PSRs are driven by their own ambition and rewarded with commissions when their efforts generate new sales. They receive their commissions in lieu of overtime and enjoy a largely autonomous work-life outside of an office. The pharmaceutical industry's representatives — detail men and women — share many more similarities than differences with their colleagues in other sales fields, and we hold that they are exempt from the FLSA overtime-pay requirement.

The Supreme Court’s decision is expected to not only resolve the numerous class and collective actions that have challenged the outside sales exemption in the pharmaceutical industry, but also to provide clarity as to the appropriate deference owed to the DOL’s opinions as expressed in amicus briefs and similar interpretive position statements.

The court determined the promotional work performed by the “sales” representatives was “not a duty directly related to Schering’s management or general business operations . . .,” adopting the Second Circuit’s analysis in In re Novartis Wage and Hour Litigation. Having already found that the “sales” representatives do not consummate sales, the court then concluded that, “neither do they design the promotional materials to be used in their sales calls . . . nor develop the ‘core message’ to be delivered during meetings with health care professionals . . . ." Likewise, while the sales representatives “helped drive Schering’s market share . . . they did so by promoting products to specific physicians in a set territory, not by marketing Schering products generally.” Schering’s representatives “use the core messages and promotional strategies developed by marketing teams; they do not develop those messages themselves or set overall market strategies.” For these reasons, their primary duty did not directly relate to Schering’s management or general business operations, and failed the second part of the test for the administrative exemption.

Schering’s sales representatives also came up short on the third part of the test for exempt administrative status according to the court. Relying once more on the Second Circuit’s decision in Novartis, supra, the trial court concluded that the discretion Schering permitted its sales representatives did not extend beyond “day to day duties” to “matters of significance.”

Thus, the sales representatives could adjust their interactions with individual physicians based on what they found to be the most effective approach. And they were not required to always deliver the same “core message” to each physician, nor to execute their sales calls according to a set script. But Schering did not permit sales representatives to present any information that had not been approved by and received from Schering. Nor were sales representatives allowed to develop their own core message, “but were instead instructed by Schering on how to deliver a core message that had been developed by a Schering marketing team . . . ." Schering set the overall market strategy for particular products, and while the sales representatives had the ability to call on doctors who were not on the target list generated by Schering, they were required to call on each doctor on that target list.

As a result of these constraints, “any discretion that Plaintiffs exercised fell within the bounds of the strategic plan and core message developed by Schering, rather than developed by Plaintiffs themselves; . . . they had no role in planning market strategy or the core message . . . ."

The court’s ruling is a further example of the unsettled state of the law on the status of pharmaceutical industry representatives. The Second Circuit’s Novartis case charts one course, determining that realities “on the ground” in the highly regulated pharmaceutical industry are insufficient to call for any industry specific analysis of what it means to make a “sale.” Meanwhile, the Ninth Circuit, in its decision in Christopher v. SmithKline Beecham, stakes out a different path with its conclusion that a “commonsensical” interpretation of the term “sale” in the pharmaceutical industry calls for a conclusion that sales representatives performing their jobs in ways much like that of their industry colleagues at Schering, qualify for the outside sales exemption.

Photo credit: Schulte Productions

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.

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.

Outside Sales

Noting that the FLSA regulations define “an ‘outside salesperson’ as an employee (1) whose ‘primary duty’ consists of ‘making sales’ or ‘obtaining orders or contracts for
services’ and (2) who is ‘customarily and regularly engaged away from the employer’s place or places of business in performing such primary duty,’” and “primary duty” to be the “principal, main, major, or most important duty that the employee performs,” the Seventh Circuit found that the undisputed facts showed that the plaintiff’s primary duty was outside sales.

In reaching this decision, the Seventh Circuit noted that the plaintiff spent four to eight hours a day outside of the office making in-person sales calls. She came into the office on only about half of her workdays and even when in the office, the plaintiff spent much of her time on work relating to sales. The plaintiff maintained a database of customers, which formed the basis for her collections and commission payments. The Seventh Circuit found that this work related directly to her outside sales work and was therefore itself exempt work. Similarly, the plaintiff spent about ten hours a week developing marketing plans and performing promotional work, and an additional five to six hours promoting the company outside of the office, including at chamber of commerce meetings. Aside from the plaintiff, only the company’s president made direct sales; therefore, the Seventh Circuit found that most of the “fruits” of the plaintiff’s promotional efforts were realized in her own sales. As a result, the Seventh Circuit concluded that the additional hours the plaintiff spent performing this promotional work also counted as exempt outside sales work.

“Combination exemption”

The Seventh Circuit also agreed with the district court that even if the plaintiff did not qualify for the outside sales exemption, she qualified as exempt under the FLSA’s “combination exemption.” Under this exemption, employees “who perform a combination of exempt duties” set forth in the regulations for the outside sales and administrative exemptions may be exempt from the FLSA. The Seventh Circuit found that to the extent the plaintiff’s work was not related to outside sales, it was primarily exempt administrative work. Specifically, the Seventh Circuit viewed the plaintiff’s work developing advertising and marketing plans, managing customer complaints, administering the customer database, and dealing with issues during the president’s absence that the president would have dealt with if he was in the office (e.g., approving orders of parts for broken machinery), as work directly related to the management and general operations of the company.

Rejecting the plaintiff’s argument that the president (her sole supervisor) micromanaged her work, the Seventh Circuit found persuasive that the plaintiff negotiated with customers over price and service credits, placed advertisements, created marketing campaigns, collected from accounts, and set her own schedule.

This entry was written by Theresa Waugh.