Wage & Hour Defense Blog : Wage & Hour Lawyer & Attorney : Epstein Becker Green Law Firm : DOL Enforcement, FLSA Coverage

By:  Michael Thompson

In Ibanez v. Abbott Laboratories, Inc., the Eastern District of Pennsylvania issued the latest ruling in the ongoing dispute over whether pharmaceutical sales representatives are exempt from the overtime requirements of the FLSA. 

The plaintiff in Ibanez was a former sales representative for Abbott.  Among other things, the plaintiff helped create “business plans which tracked doctors by market share and potential.”  The plaintiff also developed “game plan[s] or strateg[ies] for individual calls with physicians.”  Thus, the District Court ruled that the plaintiff exercised significant independent discretion, and therefore fell within the Administrative exemption of the FLSA. 

This dispute over the exempt status of pharmaceutical sales representatives has arisen as plaintiffs have argued with increasing frequency that the representatives do not fall under the Outside Sales exemption.  This argument is based on the fact that these sales representatives do not “close” any sales.  Rather, a sale is closed outside the presence of a sales representative (when a patient fills a prescription at a pharmacy). Accordingly, plaintiffs contend, the Outside Sales exemption is inapplicable to these sales representatives and they are therefore entitled to overtime.

The battle lines in this dispute over the status of pharmaceutical sales representatives have been drawn around the rulings of three federal circuit courts: the Ninth Circuit, which has applied the Outside Sales exemption to these sales representatives; the Third Circuit, which has applied the Administrative exemption to these sales representatives; and the Second Circuit, which has declined to apply either exemption, found sales representatives to be non-exempt and therefore required employers to pay overtime compensation.

The Ninth Circuit Court of Appeals in Christopher v. SmithKline Beecham Corp., for example, rejected the argument that pharmaceutical sales representatives did not qualify for the Outside Sales exemption. The Ninth Circuit recognized that the sales representatives do not “close” direct sales.  However, the Court noted that the sales representatives were prohibited by law from making direct sales.  The Ninth Circuit accordingly held that, in the context of the industry, “common sense” showed that the pharmaceutical sales representatives fell within the terms of the Outside Sales exemption.

Conversely, in In re Novartis Wage & Hour Litigation, the Second Circuit Court of Appeals concluded that the Novartis sales representatives did not meet the requirements of the Outside Sales exemption because they did not “make sales.”  

The Second Circuit then evaluated whether the sales representatives had enough independent discretion to qualify for the Administrative exemption.  It was undisputed that the Novartis sales representatives were required to visit a given physician a certain number of times.  It was undisputed that the Novartis sales representatives were required to promote a given drug a certain number of times, and it was undisputed that the Novartis sales representatives were required to hold at least a certain number of promotional events per trimester.  Thus, the Second Circuit accepted the sales representatives claim that she did “low-level discretionless marketing work” and did not exercise sufficient discretion and independent judgment to satisfy the Administrative exemption

Finally, in Smith v. Johnson & Johnson, the Third Circuit Court of Appeals found that thus it was unnecessary to consider the Outside Sales Exemption because the sales representatives in that case satisfied the FLSA’s Administrative exemption.  The Third Circuit noted that the plaintiff developed her own strategic plan to achieve higher sales.  The plaintiff herself prioritized her responsibilities in a manner that maximized business results. Indeed, the plaintiff admitted that “[i]t was really up to [her] to run the territory the way [she] wanted to.”  The Third Circuit concluded that, by formulating and implementing the strategies for her territory, the plaintiff exercised sufficient independent discretion to qualify for the Administrative exemption

Like the plaintiff in the Johnson & Johnson case, the plaintiff in Ibanez exercised the discretion to develop his own business plans and thus stood in contrast to the plaintiff in the Novartis case.  Indeed, the District Court cited to twelve admissions made by the plaintiff regarding his job duties.  Seven of those admissions related to plaintiff developing various strategic plans (e.g. business plans, call plans, focus plans, etc.).

Thus, Ibanez further demonstratesthat the key to establishing the Administrative exemption for pharmaceutical sales representatives is the exercise discretion in formulating business strategies. Accordingly, sales representatives who help to create their own business plans have a strong argument for exempt status, while sales representatives who carry out strategies given to them have a more difficult argument.

By Daniel R. Levy

On November 16, 2011, the New Jersey Appellate Division held that registered nurses are exempt from overtime compensation under the New Jersey Wage and Hour Law (“NJWHL”), N.J.S.A. 34:11-56a1 to 56a30, even if paid on an hourly basis, because they fall within the “professional” exemption. Anderson v. Phoenix Health Care, Inc., A-2607-10T2 (N.J. App. Div. Nov. 16, 2011). The Court further held that, even if registered nurses were not exempt, a claim for overtime compensation may nevertheless fail under the NJWHL’s good faith exception, N.J.S.A. 34:11-56a25.2, if the employer establishes that it conformed to the Division of Wage and Hour Compliance’s (“Division”) “longstanding interpretation that registered nurses are not entitled to overtime so long as they are compensated in excess of the weekly minimum” salary required for exemption.

The NJWHL requires that employees pay one-and-one-half times an employee’s hourly wage for each hour worked in excess of forty hours per week. Excepted from this general rule are individuals employed in a bona fide executive, administrative, professional or outside sales capacity. N.J.A.C. 12:56-7.1. Under N.J.A.C. 12:56-7.3(a), which was in effect until mid- 2011, a professional was defined as an employee whose primary duties consisted of work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study, as distinguished from a general academic education, and who is compensated not less than $400.00 per week. The regulation, however, has since been superseded by regulations adopted on August 15, 2011 that adopted the federal regulations under the federal Fair Labor Standards Act (“FLSA”). N.J.A.C. 12:56-7.2(a); 43 N.J.R. 2353.

In Anderson, plaintiffs, registered nurses formerly employed by Phoenix Health Care, Inc., filed a putative class action seeking relief for overtime compensation under the NJWHL. Plaintiffs moved for class certification and defendants cross-moved for summary judgment, arguing that registered nurses are exempt from the NJWHL’s overtime requirements and asserting that plaintiffs’ claims were otherwise barred by the NJWHL’s good faith defense. The trial judge granted defendants’ cross-motion, and plaintiffs appealed.

On appeal, the Court affirmed dismissal of plaintiffs’ NJWHL claim despite plaintiffs’ argument that they were not exempt because they were paid on an hourly, not salaried, basis. The Court reasoned that although the applicable regulation did not expressly exempt professionals paid on an hourly basis, such as a majority of registered nurses, “the NJWHL was not intended to permit overtime to such employees when they are compensated at least as much as the weekly minimum referred to in N.J.A.C. 12:56-7.3(a)(5).” The Court also held that summary judgment was appropriate based upon the NJWHL’s good faith exception because defendants conformed to the Division’s “longstanding interpretation that registered nurses are not entitled to overtime so long as they are compensated in excess of the weekly minimum.”

In a footnote, the Court recognized that N.J.A.C. 12:56-7.3 was superseded by regulations adopting the federal regulations under the FLSA. Those federal regulations state, in pertinent part, that “[r]egistered nurses who are registered by the appropriate State examining board generally meet the duties requirements for the learned professional exemption but licensed practical nurses generally do not qualify as exempt learned professionals.” 29 C.F.R. 541.301(e)(2). The Court stated that it was not opining as to whether the result would be the same under the newly adopted regulations. 

Employers should proceed with caution as a result of the Court’s decision in Anderson, specifically because it construed regulations that have been superseded.  If New Jersey courts continue to follow this ruling under the newly promulgated regulations, it may lead to inconsistent results under the NJWHL and FLSA. It is clear that registered nurses paid on a salary basis will likely qualify under the professional exemption under both the NJWHL and the FLSA. 

It remains unclear, however, whether registered nurses paid on an hourly basis will be found exempt under the NJWHL. In order for a registered nurse to be exempt under the FLSA, the registered nurse must be paid on a salary basis. See 29 C.F.R. 541.600(e) (stating that the salary requirement applies to nurses); Anani v. CVS Rx Servs., 788 F.Supp.2d 55 (E.D.N.Y. 2011) (registered nurses perform exempt duties and question of whether they are, in fact, exempt turns on whether they are paid on a salary basis). If New Jersey courts follow the FLSA regulations, as the newly promulgated New Jersey regulations state they will, registered nurses paid on an hourly basis will not be found exempt under the NJWHL. If, however, the decision in Anderson is followed under the new regulations, then registered nurses paid on an hourly basis will likely be found to be exempt under the NJWHL.         

The U.S. Department of Labor's Wage & Hour Division has issued two new opinion letters addressing circumstances under which employers may not reduce the hours of exempt employees without running afoul of the "salary basis" test and risking loss of the employees' exempt status.  

First, some background.  Employees exempt from the FLSA's minimum wage and overtime requirements as professional, executive, or administrative employees must be paid a salary of at least $455 per week. Under 29 C.F.R. § 541.602(a),

[a]n employee will be considered to be paid on a "salary basis" . . . if the employee regularly receives each pay period . . . a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. . . . An employee is not paid on a salary basis if deductions from the employee’s predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business. If the employee is ready, willing and able to work, deductions may not be made for time when work is not available.

In the first opinion letter, the employer sought to reduce the hours worked by employees using the following system:

Your client proposes occasionally reducing the hours worked by exempt employees due to short-term business needs (e.g., low patient census). In such cases, the employer offers “voluntary time off” (VTO), where employees may, at their option, use paid annual, personal, or vacation leave, but continue to accrue employment benefits. The employer approves VTO on a first-come, first-served basis. If there are insufficient volunteers for VTO, the employer requires “mandatory time off” (MTO) under a seniority-based rotational method. Exempt employees required to take MTO may use accrued paid leave or take unpaid MTO. If the employee elects not to use accrued paid leave or does not have sufficient accrued paid leave to cover the VTO or MTO, the employer deducts the amount equal to the VTO or MTO from the employee’s salary, if it is shorter than one workweek. For unpaid VTO or MTO lasting an entire workweek, the employer does not pay the salary for that pay period. Salaried exempt employees may take VTO or be assigned MTO in one-day increments.

The DOL opined that salary deductions due to MTO lasting less than a workweek violate the salary basis requirement and may cause the loss of exempt status.  "Deductions from salary due to day-to-day or week-to-week determinations of the operating requirements of the business are precisely the circumstances the salary basis requirement is intended to preclude." 

In the second opinion letter, the employer proposed requiring salaried exempt employees to stay home or leave work early during periods of insufficient work.  The employer would deduct the non-work time from the employees’ accrued paid time-off accounts. The employees would receive their regular salaries so long as they had sufficient hours in their PTO accounts to cover the non-work periods. If an employee’s accrued PTO was exhausted, the employee’s salary would be reduced in full-day increments, except that in no event would an employee’s salary be reduced below the $455 per week.

The DOL opined that this proposal would also run afoul of the salary basis test. 

If an employer requires that an exempt employee work less than a full workweek, the employer must pay the employee’s full salary even if: (1) the employer does not have a bona-fide benefits plan; (2) the employee has no accrued benefits in the leave bank; (3) the employee has limited accrued leave benefits, and reducing that accrued leave will result in a negative balance; or (4) the employee already has a negative balance in the accrued leave bank. 

The DOL also opined that if an exempt employee’s accrued PTO is exhausted and the periods of insufficient work continued, the employer would not be permitted to send the employee home and pay him a reduced salary for the week.  The DOL distinguished this situation from the scenario discussed in a 1970 opinion letter, in which the employer was considering a permanent change in the work schedule from 52 five-day workweeks to 47 five-day workweeks and 5 four-day workweeks. "In that case," the DOL noted, "the salary basis requirement was not circumvented because all the exempt employees were to be paid according to a bona fide reduction of one-fifth of their salaries for a fixed schedule of five annually recurring four-day workweeks."

The distinguishing principle was stated in a 1995 DOL opinion letter:

... a fixed reduction in salary effective during a period when a company operates a shortened workweek due to economic conditions would be a bona fide reduction not designed to circumvent the salary basis payment. Therefore, the exemption would remain in effect as long as the employee receives the minimum salary required by the regulations and meets all the other requirements for the exemption.

My takeaway from these opinion letters is this:  Employers that are considering reducing their exempt employees' hours due to insufficient work must proceed very carefully.  Reducing exempt employees' hours of work, and reducing their pay correspondingly, may be permissible if the changes are carried out in accordance with a fixed schedule over an extended period of time.  An employer may not make reductions in work hours and pay based on day-to-day or week-to-week determinations of how much work is available.  Such reductions will run afoul of the salary basis test, risk forfeiture of the employees' exempt status, and expose the employer to overtime claims from the employees when their workload increases.     

The following is a reprint of a client alert authored by EBG attorneys Doug Weiner and Frank Morris, Jr.  It should be of interest to all Florida employers that are considering a reduction in force.

For many employers, these are desperate economic times. Every entity facing diminished revenue must consider cost cuts to survive. As news reports show, reductions in force (RIFs) are being used daily to achieve cost savings, and for some employers they may be the best solution. In some cases, however, the savings are not immediate as a result of statutorily required or voluntary notice periods, as well as costs of severance pay.

A different approach may be a furlough strategy, customized to fit each employer’s needs, which may also achieve a significant cost-savings benefit. Implementing a furlough can help retain the employer’s experienced workforce at a reduced cost, to help the enterprise weather the economic crisis. Most employees faced with, for example, the choice of a 20 percent annual pay reduction or the loss of their job would not hesitate to choose a reduction in pay. Further, both employers and employees taking advantage of a furlough program are well-positioned to take advantage of any increase in business activity in the inevitable economic recovery, whether it be this year or next. Furloughs are often viewed by the workforce more favorably than layoffs, thus preserving morale in the organization as well.

The Fair Labor Standards Act (“FLSA”) requires hourly and non-exempt salaried employees to be paid time-and-one-half their regular rate for weekly hours worked over forty. Accordingly, the first place to look for cuts in employee payroll costs is in non-exempt employee overtime pay. The FLSA was designed to give employers an incentive to spread employment from employees who work over forty weekly hours to other workers who are working fewer hours. In an environment where costs are critical, it is generally an inefficient use of payroll dollars to pay the additional wage premium required for overtime work.

Eliminating non-exempt overtime work is only the first step in reducing payroll costs among hourly non-exempt employees, salaried non-exempt employees and salaried exempt employees. Take an example in which it has been decided that in a department of 100 employees, where all three categories of employees work, that payroll expenses must be cut by 20 percent. One possibility is to reduce the department headcount by 20 percent, eliminating 20 jobs and the costs associated with them. Another possibility is to implement a mandatory furlough period with 20 percent pay cuts for all 100 employees. The furlough strategy takes more administrative time to manage properly, but it potentially saves 20 jobs while achieving the necessary cost-saving objective.

The FLSA allows employers to implement a variety of options to impose salary reductions and pay cuts, as do most state laws. A salary may be prospectively reduced without violating the “salary-basis” test of the FLSA for exempt employees, including a reduction in pay proportionate to a reduction in the number of days worked. Managers may implement furloughs and RIFs simultaneously or in a phased sequence. As with all such strategies, any applicable state and local requirements need to be determined, as federal law will defer to a state or local standard that provides a greater protection to the employee. California, as shown by the state’s decision to furlough state employees, allows furloughs to be implemented in accord with particular wage-hour requirements that must be considered.

The FLSA permits prospective adjustments to an exempt employee’s salary, including revisions to commission agreements or bonus compensation plans based on the quantity or quality of work, which do not reduce the “predetermined amount” of the employee’s salary (of course, the terms of the plans also need to be checked before changes are made). In concept, if the duties test for exemption is satisfied, the predetermined salary of, e.g., an exempt Sales Manager, could be as low as $455 per week, while the compensation the employee actually receives could be substantially higher (based upon commissions for meeting sales goals or bonuses for meeting other performance criteria). To preserve the salary basis of the exempt employee, the predetermined amount of salary would have to be paid for workweeks in which there were no commissions, or for which no bonus payments were made.

Careful strategic planning is required before implementing a furlough. Considerations include:

• Exempt salaried employees may have their salaries prospectively reduced to a lower predetermined amount so long as they stay above $455 per week. Salary adjustments may not be designed to circumvent the requirements of the FLSA.

• Hourly workers must be paid for every hour they are directed or permitted to work. Permitting “extra” work as, for example, spending more than de minimus time checking a Blackberry®, even when unauthorized, may well give rise to the obligation to pay for the time. Accordingly, managers must take the necessary steps to ensure the furlough plan realizes the necessary cost savings.

• It is a good practice to give employees clear notice specifying that no “volunteer work” is permissible and no work is to be performed unless specifically authorized by a predetermined schedule or authorization by an appropriate manager. Implementing a strict policy of prohibiting unscheduled work and having an administrative procedure to uniformly enforce the policy is well advised.

• Managers may consider asking hourly and salaried non-exempt employees for the return of employer-owned remote access devices during a furlough. Employees who access their work email accounts while on their “time off” may be working, or may start working. If they are working, even though advised not to do so, the employer may well incur wage liability, defeating the purpose of the furlough. Unauthorized work by non-exempt employees in violation of the employer’s furlough policy may generate exposure to significant wage claims. Violations of the furlough policy should be considered a serious disciplinary issue, warranting sanctions, including suspension and discharge. Withholding pay for hours actually worked, however, is not a legal option, even when the hours worked were not authorized.

• Salaries for exempt and non-exempt employees may be prospectively reduced so long as those adjustments are not so frequent as to appear designed to circumvent the requirements of the FLSA. Quarterly adjustments have been found by the U.S. Court of Appeals for the Second Circuit to be in compliance with the FLSA. Adjustments to the predetermined amounts of salary should be implemented as infrequently as feasible so as not to raise an argument that the adjustments are a pretext to avoid compliance with the FLSA.

In sum, properly implemented salary reductions should comply with the salary requirements of the FLSA. Although it requires strategic planning and careful implementation, employers may find many benefits by implementing an effective cost-savings furlough plan that saves money and jobs, versus the RIFs dominating the news.