• Second Circuit Narrowly Circumscribes FLSA's Outside Sales and Administrative Exemptions
  • July 22, 2010 | Authors: Jeffrey W. Brecher; Paul DeCamp
  • Law Firms: Jackson Lewis LLP - Hartford Office ; Jackson Lewis LLP - Melville Office ; Jackson Lewis LLP - Reston Office
  • Continuing the judiciary’s increasingly narrow interpretation of the overtime exemptions under the Fair Labor Standards Act (“FLSA”), the U.S. Court of Appeals for the Second Circuit (in New York) has held that pharmaceutical sales representatives are not exempt outside sales or administrative employees.  In re Novartis Wage & Hour Litig., No. 09-0437-cv, 2010 U.S. App. LEXIS 13708 (2d Cir. July 6, 2010). The Court concurred with and deferred to the position of the U.S. Secretary of Labor, who appeared as amicus curiae or “friend of the court.”  The Court’s limiting view of the FLSA’s exemptions potentially affects all employers within the Circuit’s jurisdiction, i.e., Connecticut, New York and Vermont.

    Pharmaceutical Sales
    Like many pharmaceutical companies, Novartis Corporation employs sales representatives.  Due to Food and Drug Administration (FDA) guidelines, the representatives cannot sell prescription drugs directly to patients or physicians.  Rather, the company sells its products to wholesalers who, in turn, sell the drugs to individual pharmacies that service and fill physicians’ prescriptions. 

    The representatives meet with physicians to educate them on company products and encourage them to prescribe those products.  As described by the Court, “[t]he goal of the Reps is to get physicians to say they will prescribe Novartis products for their patients.” 

    To assist the representatives, Novartis provides training on messaging as well as promotional materials.  It also evaluates representatives on their delivery of the core message.  The representatives’ goal is to obtain a commitment from the physicians that they will prescribe Novartis drugs. 

    Representatives’ total compensation, including bonus, for 2005 was over $90,000 each, and many earned in excess of $100,000.

    Lower Court Finds for Exemptions

    In finding the representatives to be exempt outside sales employees, the District Court stated that the lack of “technical” sales activity is not determinative.   The “reality” of the representative’s role (initiating the physician’s prescription of Novartis products) was  sufficient sales activity, according to the court, to fall within the spirit and letter of the exemption.  

    The District Court further held that the administrative exemption was applicable since the representatives performed non-production work that plays a crucial role in the dissemination of product information.   The representatives’ assertion that they do not utilize sufficient independent discretion and judgment to fall under the exemption was rejected by the District Court.  It stated that just tailoring the message for each physician demonstrated that the representatives consistently exercise sufficient independent discretion and judgment. 

    The District Court found it unnecessary even to consider the company’s argument that those representatives who earned in excess of $100,000 also were exempt under the highly compensated exemption introduced in the Department of Labor’s 2004 revisions to its regulations governing the FLSA’s white collar exemptions.  (The highly compensated exemption requires merely the performance of one exempt duty.)

    Appeals Court Reverses on Outside Sales Exemption

    In reversing the District Court, the Second Circuit showed great deference to the DOL.  It stated that the Secretary of Labor’s interpretations of her regulations are entitled to “‘controlling’ deference unless those interpretations are ‘plainly erroneous or inconsistent with the regulation’.”  The Second Circuit concluded the Secretary’s position that the representatives’ promotional work with physicians is not “making sales” within the purview of the outside sales exemption was fully consistent with the governing regulations and their preamble.  “Where [an] employee promotes a pharmaceutical product to a physician but can transfer to the physician nothing more than free samples and cannot lawfully transfer ownership of any quantity of the drug in exchange for anything of value, cannot lawfully take an order for its purchase, and cannot lawfully even obtain from the physician a binding commitment to prescribe it[,] . . . it is not plainly erroneous to conclude that the employee has not in any sense, within the meaning of the statute or the regulations, made a sale,” the Court held.  It therefore concluded the outside sales exemption inapplicable.

    Appeals Court Reverses on Administrative Exemption
    As to the applicability of the administrative exemption, the Second Circuit again deferred to the Secretary’s view, detailed in the DOL’s regulations, that the exercise of independent discretion and judgment as to matters of significance required for the administrative exemption “means more than simply the need to use skill in applying well-established techniques or procedures prescribed by the employer.”  

    Based on its analysis of the representatives’ jobs, the appeals court concluded that the following “four freedoms” which Novartis asserted demonstrated the exercise of independent discretion and judgment as to matters of significance were insufficient and merely were skills gained through training.  These included the representatives’: (i) ability to answer physicians’ questions regarding products; (ii) ability to develop a rapport with physicians; (iii) ability to remember past conversations with physicians; and (iv) ability to recognize whether a message has been persuasive.