A storm is brewing over the issue whether outside sales representatives are entitled to overtime compensation. In 2006, an outside sales rep employed by international pharmaceutical company Novartis AG filed a $225 million class action lawsuit in a federal court in New York. A similar class-action lawsuit was filed against Novartis in California, and both cases were consolidated in the New York case and are now referred to as In Re Novartis Wage and Hour Litigation. At the same time, similar lawsuits were being filed against other major pharmaceutical companies, including AstraZeneca, Pfizer, Johnson & Johnson, Amgen, Eli Lilly, Hoffman Laroche, GlaxoSmithKline, and Bayer. At the heart of all these lawsuits is the allegation that although the drug companies classified these outside sales reps as exempt and not entitled to overtime compensation, they are not exempt under federal and state laws. In other words, these are colossal back-pay cases.
In what may turn out to be a game-changing move, the Department of Labor waded into this sea of class action lawsuits by filing an Amicus Curiae (meaning “friend of the court”) brief in the Novartis litigation supporting the plaintiffs. And because administrative agencies must be given deference by the Courts when it comes to interpretation of that agency’s regulations, the Novartis court and other courts across the country may start adopting the DOL’s suggested interpretations. If that happens, companies across America could become immediately liable for overtime pay from the last two years for all of their outside sales staff.
I’ve been watching this litigation escalate and see now that, whatever the outcome, it will impact any business that relies on outside sales reps, not just pharmaceutical companies. Outside sales reps are often the lifeblood of a successful business. They are responsible for maintaining, growing, and initiating business relationships with your clients through carefully tailored business plans. Your outside sales staff have superior knowledge of your products, the ability to communicate and strategize effectively, and the stamina to work 10-hour days. As an integral member of your team, outside sales reps are compensated well, often through combinations of salary, commissions and bonuses. But is that compensation enough? And if it isn’t, what price will you pay?
The Fair Labor Standards Act (FLSA) regulates wage and hour rules, which apply to employers. Under the FLSA overtime rules, an employer must pay 1.5 times an employee’s regular rate for those hours worked in excess of 40 per week, unless an exemption applies. If an employer improperly classifies an employee as “exempt”—meaning no overtime pay is required—the employer will be responsible for the overtime pay owed, going back two to three years, and may be liable for an equal amount in liquidated damages. Improper classification of employees can be a dangerous and expensive problem. In 2007 alone, the federal Department of Labor (DOL) helped over 341,000 employees recover more than $220 million in back wages.
If your company employs outside sales representatives, these exemptions, and potential changes in the interpretation of the exemptions, can affect your business dramatically. Considering one of the exempt categories of workers is “outside salespersons” you would think that outside sales staff would be exempt. Unfortunately, the law is not that clear cut. The DOL takes the position that many outside sales representatives do not fall under the “outside salespersons” exemption or the “administrative employee” exemption. Relying on their actual job responsibilities and not just their title, the DOL claims that many outside sales reps are not actually in the business of “sales,” since many representatives only get the client to sign a non-binding contract to use more of a company’s product, or instead only work towards aggressively “promoting” the company’s products.
Further, since many outside sales people are not authorized to make decisions on matters “of significance” to a company, the DOL believes they should not fall under the administrative exemption, either. In the DOL’s eyes, outside sales reps are not overtime exempt, and employers should be compensating them with overtime pay. The Courts are not in agreement, however.
Courts across the country, as recently as February 2, 2010, have found outside salespeople to be exempt under either the “outside salesperson” exemption or the “administrative” exemption. For those courts that have upheld the outside salesperson exemption, the Yacoubian decision from a U.S. District Court in California aptly summarizes why:
“Plaintiffs cannot escape the fact that they perform their duties in a way traditionally associated with outside salespeople. They spend the great majority of their time out of the office. They are not generally subject to direct supervision while they go about their business. They do not report to work first thing in the morning and clock in. They have a large degree of autonomy, which would make it more difficult to make them accountable for every minute of their day. If they work harder and excel, pharmaceutical sales representatives can convince more physicians to write prescriptions for the drugs they sell. Then drug companies rewarded them with better performance evaluations and greater incentive compensation. They are almost wholly unlike those workers who are traditionally nonexempt. Plaintiffs and other pharmaceutical sales representatives are precisely the type of employees envisioned when Congress established the outside salesman exemption from the FLSA. Plaintiffs fall under the outside sales exemption.”
Yacoubian, and several other exemption related cases, are currently pending before the 9th Circuit Court of Appeals. Because Washington is in the 9th Circuit’s jurisdiction, outside sales reps working for Washington-based employers still fall under the FLSA exemption because of Yacoubian. So, for now, the reasoning of the Yacoubian decision provides some comfort to employers in Washington and the other western states covered by the 9th Circuit. This could all change, however, once the Court of Appeals rules. And it would be a mistake not to assume that the 9th Circuit is carefully reviewing developments in the other pharmaceutical class actions as well as the DOL’s Amicus brief.
The good news is that in all of the Court opinions recently published, the decisions have been made on a very “fact specific” basis where the actual duties and responsibilities of outside sales and marketing reps have been examined closely. For example, earlier this month the 3rd Circuit Court of Appeals in Smith v. Johnson & Johnson ruled that a senior professional sales rep employed by Johnson & Johnson to promote a pharmaceutical drug was exempt. The employee’s job involved visiting doctors and hospitals in her assigned territory to promote the benefits of Concerta, a drug used to treat attention deficit disorders. Drilling into the specifics of the employment relationship, the Court found the employee was paid an annual salary of $66,000, not paid overtime for hours in excess of 40 per week, worked unsupervised 95% of the time, and was required to use a “high level of planning and foresight” in developing a “strategic plan” to generate sales in her territory. Based on those facts, the Court concluded the employee exercised the discretion and independent judgment required by the FLSA’s “administrative employee” exemption.
This fact-driven judicial approach allows employers to review their current job descriptions and the actual job responsibilities of their outside sales representatives to evaluate how they would fare should an employee file suit against them. The criteria for determining who fits into one of the FLSA exemptions is in flux, but staying abreast of developments and responding quickly can save your company the time and expense that accompanies modern litigation.
In what should be a caution to employers everywhere about reading too much into the result of any one of these cases, the Court in Smith v. Johnson & Johnson stated in a footnote:
“Smith’s situation is not unique, and cases similar to this one are pending in the Courts of Appeals for the Second and Ninth Circuits. Our opinion, however, focuses on Smith and the specific facts developed in discovery in this case. Consequently, we recognize that based on different facts, courts, including this Court, considering similar issues involving sales representatives for other pharmaceutical companies, or perhaps even for J&J, might reach a different result than that we reach here.”
It is worth noting that Washington State’s Department of Labor & Industries has nearly identical criteria for evaluating the exempt status of outside sales reps from wage and overtime requirements. Still, I recommend review of those standards, found at WAC 296-128-540, because where differences exist between Washington State and federal overtime regulations, an employer must generally follow the regulation that is most favorable to the worker. For additional information, please check out the Washington Department of Labor & Industries Overtime Comparison Chart.
For now, the best course of action is to review the job descriptions and actual responsibilities of your outside sales staff with your lawyer, but here are a few tips to assist in your initial review:
• Do your outside sales reps have the authority to make sales?
• Do your outside sales reps earn more than $250 per week?
• Do your outside sales reps perform office or non-manual work directly related to the management or general business operations?
• Do your outside sales reps have the discretion to make “independent choices, free from immediate direction or supervision” on matters of importance to the business?
• Do your outside sales reps control their total hours worked?
• Do your outside sales reps spend more than 20% of their inside office work on non-outside sales related duties?
I’ll continue to monitor the developments in the pharmaceutical litigation and post about any significant developments. In the meantime, just know that the legal landscape of overtime compensation for outside sales reps is still uncertain and treacherous.