Following my December 2011 post entitled “Pharma Reps Paid to Sell or to Market, That is the Question,” the Seventh Circuit revealed its own opinion on the issue of whether pharmaceutical sales reps are exempt from overtime pay and other Fair Labor Standards Act (FLSA) protections. The Seventh Circuit issued the Schaefer-LaRose v. Eli-Lilly & Co. opinion in May 2012, complicating the debate already dividing the Second and Ninth Circuits.
The United States Supreme Court will soon consider whether the Ninth Circuit appropriately held in Christopher v. SmithKline Beecham Corp. that the outside sales exemption applied to pharmaceutical sales representatives. The Christopher opinion directly contradicted the findings of the Department of Labor and the Second Circuit in In Re Novartis, which held that pharmaceutical sales reps do not meet the exemption’s requirements because they do not sell any drugs, do not obtain any orders for drugs, and can at most obtain from physicians a non-binding commitment to prescribe drugs to their patients. The Supreme Court will ultimately decide which appellate court, if any, got it right. Oral arguments were on April 16, 2012.
The Seventh Circuit in Schaefer-LaRose declined altogether to address the applicability of the outside sales exemption. Instead, the court held that the administrative exemption to the overtime requirements of the FLSA applied to pharmaceutical sales reps. According to the FLSA, the exemption from the overtime requirement applies to “any employee employed in a bona fide executive, administrative, or professional capacity.” An employee employed in a bona fide administrative capacity is one whose compensation is salary based, whose primary duty is the performance of office or non-manual work directly related to the management of the employer or employer’s customers, and whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
The Seventh Circuit emphasized that pharmaceutical sales reps do not manufacture products or make individual sales of medications. On the contrary, their function is to be a representative of the company to the medical community and promote sales generally by ensuring that confidence in the product is continually high. In the Seventh Circuit’s view, these job duties exempt the pharmaceutical sales reps from overtime pay because they are properly defined as “administrative employees.”
Although the Supreme Court will not directly consider the administrative exemption at issue in Schaefer-LaRose, a decision favoring the DOL and Second Circuit opinion could cause employers to rely on the Seventh Circuit’s interpretation in future cases.
In preparing for the Supreme Court’s ultimate decision, employers with outside sales employees should take immediate steps to reduce the risk of costly litigation. At a minimum, employers who have not recently audited their wage and hour practices should consider whether this might be a good time to do so.
Ice Miller, LLP
Special thanks to Summer Associate George Kiamos for his contribution to this analysis.