“Outside Salesmen”?
Diagnosis Unclear
© 2011 Fisher & Phillips LLP
By Grace Horoupian And Matthew Sgnilek (Irvine)
Just last August, the U.S. Court of Appeals for the 2nd Circuit issued
a ruling that sent shock waves through segments of the healthcare
industry. Then, as affected employers began responding to that decision, the
9th Circuit reached an apparently contradictory decision that may have
raised more questions than it answered.
Dueling Decisions
In the first, the 2nd Circuit held that pharmaceutical sales
representatives (PSRs) were not exempt from overtime as outside sales
persons under the Fair Labor Standards Act (FLSA). In Re Novartis Wage
& Hour Litigation. In making its decision, the court relied heavily on a
Department of Labor legal brief, which strongly urged a finding that the
PSRs were not exempt as outside sales persons.
The DOL’s contention that PSRs were not exempt caught the
industry off-guard and seemingly contradicted the position taken by the
DOL for over 70 years. Since the inception of the outside-sales exemption
in 1938, the DOL had remained silent on the issue and acquiesced to
findings that PSRs qualified for the outside sales exemption.
But the more recent 9th Circuit case of Christopher v. SmithKline
Beechman indicates that the impact of Novartis and the DOL’s
newly-adopted interpretation may be short-lived. In SmithKline, PSRs filed
a suit contending that they were not outside salesmen and should have been
paid overtime. SmithKline moved for summary judgment contending the
PSRs were exempt as outside salespersons and not entitled to overtime.
Breaking with both the DOL and the Novartis court, the 9th Circuit agreed
with SmithKline and found that PSRs were outside salespersons exempt
from overtime requirements.
The Underlying Principal
To qualify for the exemption from overtime pay under the FLSA’s
outside sales classification, 1) an employee’s primary duty must be
making sales or obtaining orders or contracts for services; and 2) the
employee must be primarily and regularly engaged away from the
employer’s place or places of business in performing this primary duty.
The key difference between the Novartis and SmithKline decisions
lies in the evaluation of whether a PSR’s primary duty is making sales.
The PSRs and DOL take a narrow reading of the exemption and argue that
because federal regulations preclude PSRs from making sales directly to
physicians, their primary duty is not making sales. Federal regulations
preclude PSRs from obtaining anything more than a non-binding purchase
commitment from the physician that, if provided with a product, the
physician will appropriately prescribe it. In adopting this narrow view, the
DOL disregarded the fact that PSRs were hired for their sales experience,
and trained in sales methods.
The SmithKline court rejected the DOL’s interpretation and took a
much more reasoned (and more realistic) approach. SmithKline found the
PSRs’ primary duty was making sales. The court reasoned a PSR’s
non-binding agreement with a physician to appropriately prescribe products
provided is, in fact, a sale. The court noted that like all other salespersons,
PSRs earned commissions based upon sales commitments and enjoyed a
largely autonomous occupation outside the office. In so ruling, the 9th
Circuit flatly rejected the DOL’s rigid interpretation of the exemption as it
applies to PSRs and even stated “deference is not warranted because the
Secretary’s position is both plainly erroneous and inconsistent with her
own regulations and practices.…”
In light of the split opinion between the 9th and 2nd Circuits, and
varying state laws that may impact the classification of PSRs, employers
should be cautious. You should discuss with employment counsel the
classification of these individuals under regional, state, and federal laws.
For more information contact either of the authors:
ghoroupian@laborlawyers.com, msgnilek@laborlawyers.com or
949.851.2424.
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