Second Circuit Strips Pharmaceutical Sales Reps of Their Exempt Status

In a consolidated opinion addressing both cases, the court held that the reps did not fall under either exemption and, therefore, had been misclassified and were entitled to unpaid overtime. The overtime payments could be significant, because the reps typically work 12-hour days, travel for their jobs, and attend after-hours events as part of their marketing efforts. The cases were remanded for a determination of the amount of unpaid overtime that is due.

The Second Circuit's Rejection of the Companies' Classifications

Novartis argued that its reps were covered by either the outside sales exemption, because they are marketing and selling products, or the administrative employee exemption, because they are highly compensated and exercise sufficient discretion and independent judgment in their jobs. The court rejected both arguments. It concluded that the reps do not qualify for the outside sales exemption because they never actually sell their product; rather, they provide information about the product and encourage doctors to prescribe it. Because they do not sell their product (i.e., by making a deal that results in the transfer of the item in exchange for money), the reps cannot qualify for the outside sales exemption. Novartis argued that physicians are asked to “commit” to prescribing a specific drug, but the court said that, by definition, physicians do not commit to buy a Novartis product because physicians are required to prescribe drugs appropriate for their patients, and they cannot make binding commitments. The court was further influenced by the fact that there is no real way to correlate the reps' compensation to drug sales. Although Novartis uses pharmacy prescription drug sales information to project how many physicians in a region have likely prescribed the drug, which helps determine reps' bonus payments, it is a rough system in which it is difficult to tie reps' compensation directly to the results of their marketing efforts. After considering these various factors, the court determined that the reps do not qualify for the outside sales exemption.

The court also rejected Novartis' argument that the reps are exempt administrative employees because the reps have little discretion over their sales strategy or methods. The reps are trained in the preferred method of questioning physicians to determine why the physicians may be hesitant to prescribe certain drugs, they are taught four “social styles” to use depending on a physician's response to a sales call, and they are provided with very specific “core messages” to convey during each sales call. Novartis also dictates the number of times per trimester that reps must visit each physician and how often they must promote each drug. The reps play no role in formulating the core messages, written marketing materials, or advertising messages. They are specifically instructed not to deviate from the core message or company-provided written materials. The court was particularly persuaded by one rep's testimony that Novartis expects the reps to act like “robots.” If a physician asks a rep a question not covered by the Novartis prepared materials, the rep must refer the physician to the company's medical department. In light of the evidence that the reps' jobs are highly formulaic and lack independent discretion, the court rejected the notion that they are covered by the administrative exemption.

Practical Impact

The Second Circuit is only the second federal appellate court to address the classification of reps under the FLSA. The Third Circuit previously ruled that reps do exercise sufficient discretion and independent judgment to qualify for the administrative exemption. There is currently a rep classification case pending in the Ninth Circuit, and other appellate courts may soon be asked to consider the question as well. The disagreement among the circuits may bring the issue before the Supreme Court within the next few years. In addition, the U.S. Department of Labor (“DOL”) does not consider reps working for pharmaceutical companies to be exempt, so the DOL may increase enforcement of overtime payments to reps in the wake of the Novartis decision as well.

While the Second Circuit held that neither of the requested exemptions applied to the Novartis reps, the administrative employee exemption may apply to reps at other companies that allow or encourage their reps to exercise more latitude and independent discretion in the performance of their jobs. As a practical matter, however, pharmaceutical companies face a unique challenge that inhibits them from permitting reps to exercise autonomy while still complying with the strict federal regulations that govern pharmaceutical marketing. Therefore, companies may not be able to continue to classify reps as exempt while still complying with other regulatory pressures.

Conclusion

If companies are unable to provide their reps with more autonomy, and they have no choice but to classify them as non-exempt employees, the industry will likely see companies begin to severely limit reps' travel time and after-hours work to cut down on the potentially high exposure to overtime payments. As other circuits, and possibly the Supreme Court, consider this issue, the pharmaceutical industry may see significant changes in the structure of reps' jobs and compensation.

Neil V. McKittrick, a member of this newsletter's Board of Editors, is a shareholder and Rachel Reingold Mandel is an associate in the Boston office of Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

The Second U.S. Circuit Court of Appeals recently held in In re Novartis Wage and Hour Litigation, No. 09-0437 (2nd Cir. July 6, 2010), that pharmaceutical sales representatives do not fall under any of the exemptions to overtime payment requirements under the Fair Labor Standards Act (“FLSA”). The court's decision exposes the two defendant pharmaceutical companies to significant damages in unpaid overtime as the result of having misclassified the employees and significantly impacts the classification of pharmaceutical sales representatives in the industry.

Background

Pharmaceutical sales representatives (“reps”) at Schering-Plough Corp. and Novartis Pharmaceutical Corp. brought two separate class actions in which they claimed that the companies had misclassified them as exempt employees who were not entitled to overtime pay. The reps claimed that they did not actually sell the companies' products, because medical professionals did not commit to purchasing or even prescribing the products in question, and the reps merely marketed the products according to a rote, highly standardized process. As a result, the reps claimed, they are not covered by either the “outside sales” or “administrative employee” exemptions to the FLSA overtime requirements.

In a consolidated opinion addressing both cases, the court held that the reps did not fall under either exemption and, therefore, had been misclassified and were entitled to unpaid overtime. The overtime payments could be significant, because the reps typically work 12-hour days, travel for their jobs, and attend after-hours events as part of their marketing efforts. The cases were remanded for a determination of the amount of unpaid overtime that is due.

The Second Circuit's Rejection of the Companies' Classifications

Novartis argued that its reps were covered by either the outside sales exemption, because they are marketing and selling products, or the administrative employee exemption, because they are highly compensated and exercise sufficient discretion and independent judgment in their jobs. The court rejected both arguments. It concluded that the reps do not qualify for the outside sales exemption because they never actually sell their product; rather, they provide information about the product and encourage doctors to prescribe it. Because they do not sell their product (i.e., by making a deal that results in the transfer of the item in exchange for money), the reps cannot qualify for the outside sales exemption. Novartis argued that physicians are asked to “commit” to prescribing a specific drug, but the court said that, by definition, physicians do not commit to buy a Novartis product because physicians are required to prescribe drugs appropriate for their patients, and they cannot make binding commitments. The court was further influenced by the fact that there is no real way to correlate the reps' compensation to drug sales. Although Novartis uses pharmacy prescription drug sales information to project how many physicians in a region have likely prescribed the drug, which helps determine reps' bonus payments, it is a rough system in which it is difficult to tie reps' compensation directly to the results of their marketing efforts. After considering these various factors, the court determined that the reps do not qualify for the outside sales exemption.

The court also rejected Novartis' argument that the reps are exempt administrative employees because the reps have little discretion over their sales strategy or methods. The reps are trained in the preferred method of questioning physicians to determine why the physicians may be hesitant to prescribe certain drugs, they are taught four “social styles” to use depending on a physician's response to a sales call, and they are provided with very specific “core messages” to convey during each sales call. Novartis also dictates the number of times per trimester that reps must visit each physician and how often they must promote each drug. The reps play no role in formulating the core messages, written marketing materials, or advertising messages. They are specifically instructed not to deviate from the core message or company-provided written materials. The court was particularly persuaded by one rep's testimony that Novartis expects the reps to act like “robots.” If a physician asks a rep a question not covered by the Novartis prepared materials, the rep must refer the physician to the company's medical department. In light of the evidence that the reps' jobs are highly formulaic and lack independent discretion, the court rejected the notion that they are covered by the administrative exemption.

Practical Impact

The Second Circuit is only the second federal appellate court to address the classification of reps under the FLSA. The Third Circuit previously ruled that reps do exercise sufficient discretion and independent judgment to qualify for the administrative exemption. There is currently a rep classification case pending in the Ninth Circuit, and other appellate courts may soon be asked to consider the question as well. The disagreement among the circuits may bring the issue before the Supreme Court within the next few years. In addition, the U.S. Department of Labor (“DOL”) does not consider reps working for pharmaceutical companies to be exempt, so the DOL may increase enforcement of overtime payments to reps in the wake of the Novartis decision as well.

While the Second Circuit held that neither of the requested exemptions applied to the Novartis reps, the administrative employee exemption may apply to reps at other companies that allow or encourage their reps to exercise more latitude and independent discretion in the performance of their jobs. As a practical matter, however, pharmaceutical companies face a unique challenge that inhibits them from permitting reps to exercise autonomy while still complying with the strict federal regulations that govern pharmaceutical marketing. Therefore, companies may not be able to continue to classify reps as exempt while still complying with other regulatory pressures.

Conclusion

If companies are unable to provide their reps with more autonomy, and they have no choice but to classify them as non-exempt employees, the industry will likely see companies begin to severely limit reps' travel time and after-hours work to cut down on the potentially high exposure to overtime payments. As other circuits, and possibly the Supreme Court, consider this issue, the pharmaceutical industry may see significant changes in the structure of reps' jobs and compensation.

Neil V. McKittrick, a member of this newsletter's Board of Editors, is a shareholder and Rachel Reingold Mandel is an associate in the Boston office of Ogletree, Deakins, Nash, Smoak & Stewart, P.C.