Wednesday, July 7, 2010

2nd Circuit issues groundbreaking ruling on sales reps and overtime payments


I’ve written a lot in the past about FLSA exemptions, particularly the administrative exemption and the outside sales exemption.

Yesterday, the 2nd Circuit issued a landmark ruling reconciling these two exemptions in the context of pharmaceutical sales reps. In In re Novartis Wage & Hour Litigation [pdf], the court was faced with the claims of approximately 2,500 Novartis reps who claim they are owed back overtime. Novartis claims it did not have to pay overtime to this class of employees, either because they qualified as exempt outsides sales people or exempt administrative professionals. The court disagreed.

The 33-page opinion is a must-read for any business that employs salespeople and pays them as exempt. The highlights:

Outside sales exemption: The sales reps do not qualify for the outside sales exemption because they do not actually sell any products. Instead, in their brief sales calls on physicians, they merely promote their employer’s product. The physician cannot neither buy directly from the rep, not commit to making a purchase:

In sum, where the 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, we conclude that … the employee has not in any sense … made a sale.

Administrative employee exemption: The sales reps do not qualify for the administrative employee exemption because their jobs lack the exercise of discretion and independent judgment. Specifically, the court pointed to the reps’ lack of any role in planning marketing strategies or formulating the core messages delivered to doctors, inability to deviate from the promotional core messages or to answer any questions for which they have not been scripted, and quotas for doctors’ visits, sales pitches, and promotional events.

Three things about this opinion stand out to me:

  1. Novartis has taken an absolute beating this summer. As Dan Schwartz at Connecticut Employment Law Blog points out, it was only seven weeks ago that a jury tagged the pharmaceutical company for a quarter-billion dollars in a sex discrimination lawsuit brought by female sales reps. Now, pending a reversal by the full 2nd Circuit or the Supreme Court, it is going to be on the hook for an untold amount of back overtime to another group of sales reps.

  2. If your business employs salespeople, this opinion has the potential to dramatically alter how you pay them. At a minimum, you should be retaining employment counsel to review—and potentially overhaul—the classifications of your employees.

  3. The Department of Labor is proving itself to be a formidable ally of the worker on the issue of FLSA exemptions. In March, it issued its game-changing Administrator’s Interpretation in which it pronounced, for the first time, that mortgage loan officers are generally non-exempt positions. In this case (as reported by Bloomberg News), the DOL submitted a brief in supporting the sales rep’s position. Your business should be looking at employees’ FLSA classifications with the same critical eye as the DOL to avoid potential problems down the road.

[Hat tip: Howard Bashman’s How Appealing]


Presented by Kohrman Jackson & Krantz, with offices in Cleveland and Columbus. For more information, contact Jon Hyman, a partner in our Labor & Employment group, at (216) 736-7226 or jth@kjk.com.

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