Ninth Circuit Solidifies Split of Authority on Drug Sales Representative Overtime Exemption

In a decision that emphasizes practicality over formalism, the Ninth Circuit recently held that pharmaceutical sales representatives (“PSRs”) are exempt from overtime pay. In Christopher v. SmithKline Beecham Corp.pdf, __F.3d___, 2011 WL 489708 (9thCir. Feb. 14, 2011) the Court concluded that the “outside sales” exemption to the FLSA applies to PSRs, meaning that they are not entitled to overtime pay. Christopher held that the PSRs’ primary duty was making sales in the sense that “sales” occur in the pharmaceutical industry.

PSRs have been the subject of numerous class and collective action cases claiming entitlement to overtime, and specifically challenging the application of the outside sales exemption to the FLSA. The basis for these lawsuits is that the law prohibits manufacturers and PSRs from directly selling prescription drugs to the public or to physicians. Thus, the plaintiffs argue, they cannot be “selling.”

As a result of the legal restrictions on direct sales, the pharmaceutical industry employs approximately 90,000 PSRs to personally convince physicians in a targeted area to prescribe the drugs for which the PSR is responsible. The PSRs personally visit physicians and provide samples along with information about the products. The goal of the PSR is to seek non-binding commitments from the physicians to prescribe the assigned product, since the law precludes a direct sale in the strict sense of the word. (Nota bena for movie aficionados: The recent film “Love and Other Drugs” depicts the competitive sales atmosphere among PSRs—and, a frolic involving the patient played by Anne Hathaway, raising unrelated issues of binding v. non-binding commitments.).

In Christopher, the GlaxoSmithKline PSRs were paid a base salary and incentive-based compensation tied to whether market share, sales volume, revenue, or dosage associated with the product increases in the PSR’s territory. The employer asserted that the “outside sales” exemption applied because the PSRs’ primary duty involved making sales or obtaining orders away from the employer’s business. The plaintiffs argued that their primary duty was not making sales, but instead communicating features and benefits of the products to physicians. The Department of Labor (“DOL”) supported the plaintiffs’ position that PSRs do not meet the primary duty test necessary for the exemption.

Congress has defined “sell” for purposes of the exemption as a “sale” or “other disposition.” Congress has not defined the specific parameters of the outside sales exemption but has granted the DOL power to issue regulations to this end. Courts typically defer to the DOL interpretation as long as it is based on a permissible construction of the statute. However, Christopher found that the DOL had not provided specific, meaningful language interpreting the meaning of sales in this context.

Christopheranalyzed the current and historical job functions for PSRs industry-wide and concluded that the job duties are homogeneous among various drug manufacturers and have changed little over the past 50-60 years. The Court emphasized that the DOL had interpreted the exemption as far back as 1940 to require only a sale “in some sense” of the word. As a result, Christopher held that the DOL’s current position in the context of an amicus brief was not entitled to deference since it had essentially acquiesced to the industry practice for decades. Further, the Court concluded that the DOL view was plainly erroneous and inconsistent with regulations and practice.

Christopher recognized that legal restrictions prohibit the PSRs from directly selling the drugs, but that physicians are in reality the decision makers that result in the sales. Based on the pharmaceutical business model, the prescription is the sale for practical purposes. The manufacturers hire PSRs based on their sales experience, exercise limited oversight of day-to-day activities of the PSRs, and tie compensation to whether sales of the product for which the PSRs are responsible increase. As a result, the Court concluded that the PSRs’ jobs involve selling at least in “some sense” of the word. The Court opined that the bulk of the PSRs’ job duties are in line with those of the “classic salesman” as set forth in a 1941 case, Jewel Tea Co. v. Williams, 118 F.2d 202 (10th Cir. 1941). The PSRs’ primary duty is not promoting their employer’s products in general to the at-large public. Instead, the PSR is primarily concerned with inducing a particular physician in a particular territory to prescribe a particular drug.

In contrast to Christopher, the Second Circuit has found that PSRs do not qualify for the outside sales exemption because they do not literally consummate sales with physicians or receive binding commitments from physicians. In re Novartis Wage & Hour Litigation, 611 F.3d 141 (2d Cir. 2010). The Novartis Court gave controlling deference to the DOL view requiring essentially a transfer of title to fall within the outside sales exemption. The Court construed the outside sales exemption narrowly against the employer and viewed the PSRs’ primary duties as promotional in nature.

Other courts have considered whether the separate “administrative” exemption to the FLSA applies to PSRs. This exemption requires that the employee receive at least $455 per week and that the “primary duty” involve discretion and independent judgment in the performance of significant office or non-manual work directly related to management or general business operations. In Smith v. Johnson & Johnson, 593 F.3d 280 (3d Cir. 2010), the Court held that the administrative exemption applied to the PSRs, finding that they engaged in planning, exercised discretion to develop their own strategies for marketing, and could chose which doctors to visit within territories. As a result, Smith rejected the PSRs’ claim that they lacked discretion with respect to matters of significance and found it unnecessary to consider the outside sales exemption.

In contrast to Smith’s application of the administrative exemption, Novartisfound that the PSRs did not exercise discretion and independent judgment with respect to matters of significance. The Court stated that the PSRs had no role in planning sales strategy or the core message to physicians and were forbidden from answering any questions for which they had not been scripted. In the wake of Novartis, the Eastern District of New York has denied summary judgment due to a factual dispute concerning the job duties and discretion of telephone claims representatives alleged to be exempt under the administrative exemption. Harper v. Government Employees Ins. Co., ___F.Supp.2d___, No. 09-2254 2010 WL 4791635 (E.D. N.Y. Nov. 16, 2010). The Court stated that the employer’s argument in favor of the exemption was strong but that more facts were needed based on the Second Circuit’s “very narrow” interpretation of the administrative exemption.

The Bottom Line: Courts are now split over the application of the outside sales exemption. The Ninth Circuit views PSRs as exempt based on the outside sales exemption and the Third Circuit reaches the same result based on the administrative exemption. The Second Circuit disagrees, holding that PSRs do not qualify for either exemption. Courts disagree on fundamental concepts, such as the deference owed to the DOL and the proper construction of the exemptions based on decades old industry practice. The Supreme Court is considering petitions for certiorari and may weigh in to resolve the difference of opinion among lower courts. Regardless, employers relying on the outside sales and administrative exemptions should review the realities of employees’ day-to-day duties, including the amount of discretion and judgment exercised.