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Second Circuit Holds Pharmaceutical Sales Representatives Entitled To Overtime Pay

November 9, 2010

This summer, in In re Novartis Wage and Hour Litigation, 611 F.3d 141 (2nd Cir. 2010), the Second Circuit Court of Appeals considered whether Novartis' pharmaceutical sales representatives ("PSRs") were exempt from the overtime pay provisions of the federal Fair Labor Standards Act ("FLSA"). After reviewing the PSRs' job duties, the court concluded that the PSRs were not exempt from the FLSA's overtime provisions, meaning that they were entitled to overtime pay for work performed beyond 40 hours per week. While the Novartis opinion involves facts somewhat unique to the pharmaceutical industry, the opinion highlights a fundamental principal that employers should always keep in mind. Determining an employee's exempt status requires a careful analysis of the employee's job duties, and relying on an employee's job title alone is often a mistake.

The FLSA's overtime provision requires employees to be paid one and one-half times their regular rate of pay for hours worked in excess of 40 per week, but the FLSA exempts certain categories of employees from this requirement. Among other exempt employees are those "employed in a bona fide executive, administrative, or professional capacity . . . or in the capacity of outside salesman[.]" 29 U.S.C. § 213(a)(1). The Novartis court considered whether two of those exemptions applied to PSRs – the "outside sales" exemption and the "administrative" exemption.

With respect to the outside sales exemption, the court held that, although PSRs function much like sales professionals in other industries, they do not actually "sell" anything. Under the DOL's regulations, an exempt outside salesperson is an employee "whose primary duty is . . . making sales" and is customarily and regularly performing this work away from the employer's place of business. 29 C.F.R. 541.500(a). PSRs, however, promote drugs to physicians and other medical providers who then prescribe them to their patients; thus, the targets of the PSRs' sales efforts, the physicians, do not buy any drugs from the PSRs. Indeed, PSRs are prohibited by law from selling drugs to medical providers or patients.

While other district courts had held that obtaining the physician's "nonbinding commitment" to prescribe the drugs is the functional equivalent of making sales, the Novartis court rejected that conclusion and deferred to the DOL's regulations. Since PSRs merely promote or market the drugs rather than actually sell them, the court held that they did not qualify for the outside sales exemption.

The court also rejected Novartis' argument that its PSRs were exempt as bona fide "administrative" employees. Three criteria must be met for an employee to fit within the "administrative" exemption: (1) the employee must earn at least $455 per week; (2) the employee's "primary duty" must be "the performance of office or nonmanual work directly related to the management or general business operations of the employer or the employer's customers"; and (3) the employee's "primary duty" must "include[] the exercise of discretion and independent judgment with respect to matters of significance." 29 C.F.R. § 541.200(a).

The Novartis court held that the PSRs failed the third criterion of the administrative exemption – discretion and independent judgment with respect to matters of significance. The evidence presented in the case showed that Novartis "strictly controlled" what PSRs could say about the particular drugs they were marketing, PSRs played no role in developing the marketing message, Novartis required PSRs to visit certain physicians and to market certain drugs at certain times, and PSRs were only allowed to answer physician questions for which they had scripted answers. Thus, while the PSRs used typical sales skills to develop rapport with physicians, they did so "within the severe limits imposed by Novartis." Novartis at 157. Because the PSRs had little discretion with respect to "matters of significance" for the business, the court held they did not qualify for the administrative exemption.

Judging by the number of wage and hour lawsuits filed against pharmaceutical companies following the Novartis decision, the potential misclassification of PSRs is an industry-wide problem. In response to a continued increase in wage and hour litigation, many employers are conducting audits to identify and correct employee misclassification issues as early as possible. If you have any questions about the exempt status of your employees, please feel free to contact any member of Varnum's Labor and Employment Practice Group.

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