Federal Courts Consider FLSA Exempt Status of Pharmaceutical Sales Representatives

In re Novartis Wage & Hour Litigation

On July 6, 2010, the United States Court of Appeals for the Second Circuit decided In re Novartis Wage & Hour Litigation, 611 F.3d 141 (2d. Cir. 2010), holding that Novartis pharmaceutical sales representatives are not exempt from the requirements of the FLSA.  Novartis argued that the sales representatives – sometimes referred to in the industry as "detail" men and women, because they provide doctors with details about the prescription drugs manufactured by their employer –  were exempt under either the outside salesmen or administrative exemption, or both.

The Second Circuit first rejected the argument that the Novartis sales representatives are "outside salesm[e]n" under the FLSA. In doing so, the court cited favorably the amicus brief filed by the United States Department of Labor (DOL) in support of the sales representatives, and gave "controlling" deference to the DOL's interpretations of its own regulations that focus on the employee's "primary duty" and require that the employee "in some sense make the sales." Under the DOL's interpretation of the regulations, a person who merely promotes a product that will be sold by another rather than transferring title does not "make the sale."

Applying the regulations to the case, the court noted several salient facts about the work performed by the Novartis sales representatives, based largely on the unique circumstances of the pharmaceutical sales industry that forbid sales representatives from actually closing a sale with physicians.  Based on these facts, the court concluded "that the district court should have ruled that the Reps are not outside salesmen within the meaning of the FLSA and the regulations."

The Second Circuit also found that the Novartis sales representatives are not exempt under the FLSA as administrative employees. The relevant issue here was whether the employees' primary duties include "the exercise of discretion and independent judgment with respect to matters of significance." Again, the court considered the facts of the case in light of its deference to the DOL's amicus brief and its regulatory interpretations, concluding that the sales representatives exercised their skills within severe limits imposed by Novartis.  The court's fact-driven analysis looked closely at the levels of discretion and independent judgment the sales representatives exercised and found these employees to be non-exempt.

On February 28, 2011, the United State Supreme Court denied the certiorari, leaving the decision of the Second Circuit in place.

For a detailed discussion of the Novartis case and other earlier decisions, see an earlier article.

Christopher v. SmithKline Beecham Corporation

On February 14, 2011, the Ninth Circuit decided Christopher v. SmithKline Beecham Corp., No. 10-15257, 2011 WL 489708 (9th Cir. Feb. 14, 2011), holding that the GlaxoSmithKline pharmaceutical sales representatives are exempt from the FLSA's overtime requirements under the "outside salesman" exemption.  Contrary to the Novartis case, the Christopher court looked to the "structure and realities of the heavily regulated pharmaceutical industry" and held that the sales representatives do qualify for the outside sales exemption.  Because the district court only addressed the outside sales exemption, the Ninth Circuit did not consider whether the sales representatives are exempt under the administrative exemption.

The Ninth Circuit also departed from the Novartis decision in its refusal to grant deference to the amicus brief submitted by the DOL in favor of the plaintiffs.  Quoting the United States Supreme Court, the Christopher court noted that an "agency does not acquire special authority to interpret its own words when, instead of using its expertise and experience to formulate a regulation, it has elected merely to paraphrase the statutory language."  Because the DOL's interpretation of "making sales" merely "parroted" the statutory language, the Ninth Circuit declined to grant the DOL deference, and in fact found its interpretation to be erroneous and inconsistent with its own regulations and practices.

Novartis and Christopher thus create a clear split among the federal circuit courts.  Despite the Supreme Court's decision not to hear the Novartis case, given this Circuit split, there is a strong possibility that the Supreme Court will ultimately consider the exempt status of pharmaceutical sales representatives. 

Related Cases

There have been several other recent federal court decisions that have addressed whether pharmaceutical sales representatives are exempt under the FLSA, with varying results.  Courts have considered or are considering the question across the country, including the Second, Third, Fifth, Sixth, Seventh, Ninth, and Eleventh Circuits.  Earlier cases, having considered both the outside sales and administrative exemptions, found both for and against treating pharmaceutical sales representatives as exempt employees, depending on the case.  Since the Novartis decision, several employers have been sued for allegedly misclassifying their pharmaceutical sales representatives, ensuring that the issue will continue to percolate through the courts for the foreseeable future.

Plaintiffs are also raising the issue under state law.  On March 18, 2011, a former Ensai pharmaceutical representative filed a class action alleging violation of the California Labor Code.  The plaintiff estimates the class to be between 50 and 90 members.  Similar to the FLSA cases, Ensai has classified its sales representatives as exempt under California law, and the putative class action seeks to challenge that classification.

What Is the Likely Impact of These Recent Decisions?

Despite, or perhaps because of, the recent decisions regarding pharmaceutical sales representatives, the proper FLSA classification of those employees and other pharmaceutical and medical technology employees is far from settled. Accordingly, pharmaceutical and medical technology employers should bear several things in mind.

First, the application of those cases finding pharmaceutical sales representatives to be non-exempt to other cases is likely limited by the particular factual circumstances surrounding these pharmaceutical sales representatives. Although the Novartis court determined that the Novartis sales representatives do not "make sales," an analysis of non-pharmaceutical medical technology sales representatives could yield a different conclusion. For example, if a sales representative promotes a medical device directly to the physician, practice, or hospital that can then purchase the device from the company that employs the sales representative, or secure a commitment to purchase the device, then there would be more facts to support an exempt classification under the outside salesman exemption then were present in the Novartis case. Similarly, to the extent that medical technology sales representatives, or even other pharmaceutical sales representatives, exercise greater discretion in the performance of their jobs than established by Novartis, a court may find the administrative exemption to apply.

Second, it is possible that sales representatives may still qualify for the highly compensated employee exemption.  An employee is exempt from the FLSA if he or she earns $100,000 total annual compensation and "customarily and regularly performs any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee."  For those sales representatives earning $100,000 per year or more, this exemption may apply even in jurisdictions where the outside sales or administrative exemptions do not.

What Should Pharmaceutical and Medical Technology Employers Do?

Going forward, pharmaceutical and medical technology employers should consider the following questions when determining whether a particular sales representative has been or is properly classified as an exempt or non-exempt employee:

Outside Salesman Exemption

• Is the employee's primary duty to actually make sales?
• Does the employee actually consummate a transaction (i.e., secure the execution of a contract for the purchase of goods) or merely promote a product in hopes of stimulating sales?

Administrative Exemption

• Do the employee's primary duties include the exercise of discretion and independent judgment with respect to matters of significance?
• Does the employee manage his or her own business and territory?
• Does the employee determine the manner and method for selling the company's product, or does he or she instead merely deliver key messages or adhere to scripts developed by the company?
• Does the employee determine his or her own schedule or routing for his or her sales calls, or does he or she instead merely follow a call list developed by the company?
• Is the employee responsible for generating his or her own business plans and ideas on how to grow the business?
• Does the employee have the authority to negotiate contract terms?

Highly Compensated Exemption

• Is the employee's total compensation (including commissions and nondiscretionary compensation) at least $100,000 per 12-month period?
• Does the employee customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee?

To avoid potential liability for misclassification under the FLSA, employers may wish to consult with outside counsel to develop a comprehensive compliance strategy.  In addition, employers should carefully consider what steps they are prepared to take to address any potential FLSA classification issues before commencing an audit of their practices.  Outside counsel experienced in conducting such audits can help employers navigate these issues and develop a comprehensive FLSA compliance strategy.