Date: August 5th, 2010
Categories: Employment Law

Earlier this year, I wrote an article discussing the storm brewing over the issue of whether outside sales representatives are entitled to overtime compensation under the federal Fair Labor Standards Act (FLSA). Lawsuits had been filed against some of the world’s largest pharmaceutical companies on the issue of overtime compensation for so-called outside sales representatives (“Reps”). Though confined to lawsuits against Big Pharma, most legal minds agree that the relevance of these decisions may reach far beyond the pharmaceutical industry.

Courts traditionally have found pharmaceutical reps exempt from overtime requirements under either an “administrative” or “outside sales representative” classification, but something about these new lawsuits is different – the involvement of the federal Department of Labor (DOL). In an action against Novartis Pharmaceutical Company in the Second Circuit Court of Appeals, the DOL waded into the rough waters by filing an Amicus Curiae (meaning “friend of the court”) brief.

In a decision handed down last month, the Second Circuit’s panel decision relies heavily on DOL’s interpretation of FLSA regulations. The court stated that DOL’s briefing should be given “controlling deference” and that “under those regulations as interpreted by [DOL], the Reps are not outside salesmen or administrative employees.” The court continued by noting that the Reps did not fall under the outside sales representative exemption because it is “clear” that “a person who merely promotes a product that will be sold by another person does not, in any sense intended by the regulations, make the sale.”

The court also discussed the “administrative employee” exemption. The court again “agreed” with DOL that despite the “freedoms” Novartis claims their Reps have, the Reps are not “sufficiently allowed to exercise either discretion or independent judgment in the performance of their primary duties.” If Novartis chooses to not appeal the decision (or if the appeal is not granted) this decision means the Reps will be entitled to back pay. If they do not fall into an exempted FLSA category, then Novartis’s Reps are eligible for overtime compensation as well. The potential magnitude of Novartis’ financial exposure is unclear, but the Second Circuit’s decision is undoubtedly a significant financial blow to the company.

The Novartis decision stands in stark contrast to the Third Circuit’s recent decisions in February and March of this year, when they held that Reps at Johnson & Johnson and Astrazeneca were exempt from overtime requirements under the administrative exemption. See Smith v. Johnson & Johnson and Baum v. Astrazeneca LP. The Third Circuit did not rule on the outside sales exemption.

Even in light of the Second Circuit’s decision in Novartis, courts within the Third Circuit do not appear swayed. As recently as July 19, 2010, the U.S. District Court for the District of New Jersey ruled for the employer in Jackson v. Alpharma, Inc., following Third Circuit precedent—finding that Alpharma’s Reps were exempt under the FLSA’s administrative exemption. The Alpharma opinion did not address the outside sales exemption stating that “in light of the Third Circuit’s clear opinion in Smith…and Baum v. Astrazeneca LP, …, the Court does not find it necessary to discuss” the Second Circuit’s Novartis opinion.

As I noted in my previous article, these cases are highly fact specific. Though courts are coming down on different sides of the fence, there are still things that you can do to protect your business from getting into a back pay nightmare:

• Review your job descriptions and the actual responsibilities of your outside sales representatives.
• Make sure that your outside sales representatives actually make sales. If they do not make sales, but instead promote products or services actually sold by others, they may not qualify for an exemption under the FLSA.
• Familiarize yourself with DOL’s Novartis briefing. Given the deference given to the document by the Second Circuit, you cannot afford to be caught unaware should the Supreme Court grant similar deference in some future case.

Finally, check back here for updates on FLSA exemptions. I will continue to monitor national cases and post updates about future developments.

It is unlikely that the divide between the Circuit courts will be resolved short of action by the United States Supreme Court. Such action would quell debate and bring a measure of certainty to this muddy area of the law. It remains unclear however, which path the Supreme Court will take: the Third Circuit “common sense” approach? Or the Second Circuit’s unabashed reliance on DOL definitions and requirements?