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 Michael Kun and Kathryn McGuigan

In recent years, the alleged misclassification of employees under California's wage and hour laws has been a hotly contested issue and the subject of a great many class actions. Faced with several appeals pending before it, the Ninth Circuit has now sought guidance from the California Supreme Court on the outside salesperson and administrative exemption tests as they apply to pharmaceutical sales representatives. Such guidance should prove invaluable to employers in the industry, and to parties to these claims.

In D’Este v. Bayer Corporation, 07-56577 (9th Cir. 2009), a pharmaceutical sales representative brought a class action lawsuit against her employer, claiming that she had been misclassified as an exempt employee and had not been paid overtime or provided meal and rest breaks in compliance with California’s wage and hour laws. The district court granted summary judgment in favor of the employer, finding that the employee was exempt under California’s outside salesperson exemption; it declined to reach the question whether she was exempt under the administrative exemption. The employee appealed to the Ninth Circuit.

 D’Este is not the only class action on appeal to the Ninth Circuit on this issue. Three other class actions on appeal before the Ninth Circuit -- and four other class actions filed in the Central District of California -- all involve the question of whether pharmaceutical sales representatives are exempt under California’s outside salesperson and administrative exemptions.

 In light of the number of actions regarding the classification of pharmaceutical sales representatives, the Ninth Circuit certified the following two questions to the California Supreme Court:

 1. Does a pharmaceutical sales representative qualify as an “outside salesperson” under Industrial Welfare Commission’s (“IWC”) Wage Orders 1-2001 and 4-2001 if the pharmaceutical sales representative spends more than half the working time away from the employer’s place of business and personally interacts with doctors and hospitals on behalf of drug companies for the purpose of increasing individual doctors’ prescriptions of specific drugs?

 2. Is a pharmaceutical sales representative involved in duties and responsibilities that meet the requirements of a person employed in an administrative capacity as defined under IWC Wage Order 4-2001?

 The Ninth Circuit will accept the California Supreme Court’s decisions on these questions.

 The California Supreme Court’s review of these questions should provide employers with a clear understanding of the application of outside salesperson and administrative exemptions from overtime and meal and rest break requirements for pharmaceutical sales representatives employed in California. The Supreme Court’s ruling will provide invaluable guidance to employers in the industry about how to classify these persons going forward, and a clearer understanding to parties already litigating this issue. Should the ruling suggest that these persons normally fall under one or both exemption, litigation of these claims by pharmaceutical sales representatives may end. Should the ruling suggest that these persons normally fall under neither exemption, a new wave of class actions could be expected.