by David W. Garland

During the last year, courts have reached different conclusions as to whether outside sales representatives of pharmaceutical companies are exempt and therefore not entitled to receive overtime under the Fair Labor Standards Act. These cases turned on the specific duties assigned to the sales representatives by their employers and point out that pharmaceutical companies need to review carefully the responsibilities of these employees.

In Smith v. Johnson & Johnson, 593 F.3d 280 (3d Cir. 2010), decided by the Court of Appeals for the Third Circuit in February, the court affirmed the district court’s holding that the pharmaceutical sales representative (Patty Smith) was exempt from overtime pay under the administrative employee exception. Smith’s position required her to visit a targeted list of doctors to promote one of J&J’s drugs, but Smith developed her own itinerary and could elect to visit some doctors more frequently. Smith was required to plan and prioritize her responsibilities in a manner that maximized business results, she was the “expert” on her own territory, and was supposed to develop a strategic plan to achieve higher sales. Although she used a message prepared by J&J and pre-approved visual aids when meeting with doctors, she had some discretion in deciding how to approach the conversation. At her deposition, Smith made perhaps an admission fatal to her claim, conceding that “[i]t was really up to [her] to run the territory the way [she] wanted to.”     

Based on Smith’s specific duties, the court concluded that her position required her to form a strategic plan designed to maximize sales in her territory. The court explained that this requirement satisfied the “‘directly related to the management or general business operations of the employer’ provision of the administrative exemption because it involved a high level of planning and foresight.” The Third Circuit also held that since Smith executed nearly all of her duties without direct oversight – and she described herself as “the manager of her own business who could run her won territory as she saw fit,” she satisfied the exercise of discretion and independent judgment prong of the administrative exemption.    

The Second Circuit, in In re Novartis Wage & Hour Litigation, 611 F.3d 141 (2d Cir. 2010), subsequently reached a different conclusion after considering the duties of the sales representatives in that case. Novartis’ sales representatives typically met with physicians for about five minutes, during which they described the benefits of Novartis’ products, provided free samples, and encouraged the physicians to prescribe Novartis drugs to patients. Novartis carefully controlled the content of these “sales” pitches, and the representatives were required to deliver a “core message” from which they could not deviate. At least every couple of weeks, a district manager accompanied the sales rep on his or her visits. One of the plaintiff sales rep plaintiffs testified that they were expected to act like “robots.”

Deferring to Department of Labor regulations, the Second Circuit concluded that Novartis’s sales reps did not come within the administrative exemption because they did not have “any authority to formulate, affect, interpret, or implement Novartis’ management policies or its operating practices.” Additionally, the court found no evidence that the sales reps were “involved in planning Novartis’ long-term or short-term business objectives,” or “carr[ied] out major assignments in conducting the operations of Novartis’ business” or had “any authority to commit Novartis in matters that have significant financial impact.”

The Second Circuit also concluded that the Novartis reps did not fall within the “outside salesmen” exemption. Again deferring to the DOL regulations, the court ruled that in order to fall within the exemption, an outside sales representative’s primary duty has to be making sales or obtaining orders or contracts for services or for the use of facilities. Since Novartis’s reps were not engaged in sales – they merely promoted the drugs to physicians during brief meetings and physicians had no obligation to commit to buying anything, even where the physicians promised to prescribed a given Novartis drug, this exemption was also not satisfied.

The facts in these cases differed, which accounted in large part for the different outcomes – and J&J, unlike Novartis, had the good fortune of a plaintiff who virtually gave away her case by admitting that she could do what she wanted to do. But the differing outcomes also highlight the need for employers to review their sales programs carefully and to structure them as much as possible to satisfy one of the exemptions. Otherwise, they may find themselves with an outcome similar to Novartis.