Supreme Court finds Pharmaceutical Sales Representatives Exempt for Overtime

In February 2011, we predicted that the Supreme Court would resolve differing opinions between the Second and Ninth Circuit as to whether pharmaceutical sales representatives are exempt employees for purposes of overtime.  This June, the Supreme Court held in a 6-3 decision in Christopher v. Smithkline Beecham Corp., that pharmaceutical sales representatives fall within the Fair Labor Standards Act’s (“FLSA”) exemption for “outside sales” employees under the FLSA. 

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New Jersey Inadvertently Eliminates Long-Standing Exemption for Commissioned Sales People and Aligns Exemptions With Federal Law

In an effort to bring its definitions for white-collar employees exempt from the overtime pay regulations into line with the federal definitions, New Jersey inadvertently eliminated a long-standing exemption for commissioned sales people.

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Should pharmaceutical sales representatives be paid overtime? It depends on where they're located (for now).

Seven months ago,we reported on a Second Circuit (Connecticut, New York, and Vermont) ruling  that held that pharmaceutical sales representatives are not exempt employees and should be paid overtime for working more than 40 hours in a week.

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Second Circuit Deals Novartis a Costly Blow

In another decision addressing the rampant misuse of the outside sales and administrative exemptions by companies, the Court of Appeals reversed a prior favorable decision for Novartis in In re Novartis Wage and Hour Litigation. The Court found that the sales representative were neither exempt outside sales people nor exempt administrative employees.

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Court Affirms Commissioned Salespeople Entitled to Overtime

One common mistake that employers make is to consider all commissioned salespeople to be exempt employees.  Most companies employ inside salespeople, including those who make telesales or e-mail sales from remote locations.  These inside sales people are generally not exempt.  Only outside salespeople and retail salespeople are exempt.  All other commissioned employees must be paid overtime if they work over 40 hours in a workweek, unless another exemption applies to them.

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New Overtime Suit Involving Outside Sales Exemption

UPS is the latest large employer to be named in a potentially massive class action overtime lawsuit.  The Company’s account managers claim that they were misclassified as exempt outside salespersons or administrative employees, even though they purportedly do not have the authority to enter into sales contracts, nor do they have managerial responsibilities.  The employee who filed the suit claims to have regularly worked sixty-hour workweeks and received only a straight salary.  The suit could eventually include hundreds, if not thousands of account managers who, according to the lawsuit, were mainly responsible for going to local businesses and delivering a pre-scripted promotional message for UPS.

Regardless of the UPS suit’s ultimate disposition, it illustrates the importance of correctly applying the outside sales exemption, particularly as the exemption pertains to employees who engage in promotional work.  Not all “salespersons” are exempt under the Fair Labor Standards Act.  Rather, only “outside salespersons” are exempt.  To qualify for the outside sales exemption, the employee’s primary duty must be making sales (as defined by the statute) and the employee must “customarily and regularly” be engaged away from the employer’s place of business. 

Ordinarily, an outside sales employee will be making sales at a customer’s place of business or at the customer’s home.  Online or telephone sales do not constitute outside sales unless they are incidental to in-person sales calls made by the salesperson to the customer.  There is no requirement that an outside salesperson constantly be away from the office.  For example, if the salesperson returns to the office to prepare sales-related paperwork, that activity by itself usually does not compromise the outside salesperson’s exempt status. 

According to the UPS suit, the Company’s account managers were mainly performing promotional work as opposed to sales.  Promotional work can constitute exempt sales work if the promotional activity is incidental to, or done in conjunction with, the employee’s outside sales work.  However, promotional work done in advance of sales made by someone else is not considered exempt outside sales work.  As with many suits that center around the outside sales exemption, the UPS suit’s success will likely depend on whether account managers made sales or just laid the groundwork for other people’s sales.        

Outside Sales Exemption: Duties Matter

Recently, a Connecticut federal court denied a summary judgment motion to a pharmaceutical company after holding that former sales representatives were not exempt under the Fair Labor Standards Act’s (“FLSA”) “outside sales” exemption. This exemption provides employers a pass from the FLSA requirement to pay overtime wages to those employees employed “in the capacity of outside salesman.”  To be classified as an outside salesperson, an employee must work away from the employer’s premises, and his or her primary duty must be either making sales or obtaining contracts or orders.

In Kuzinski et al, v. Schering Corp., No. 3:07cv233 (U.S. Dist., D. Conn. March 30, 2009), the plaintiffs, a group of former sales representatives from throughout the country, alleged that Schering Corp had misclassified them as “exempt” employees under the FLSA exemption for outside salespeople and, as a result, the company failed to pay them overtime wages to which they were entitled. 

In denying defendant’s motion for summary judgment, this court held that under the FLSA, the sales representatives for the Company did not “sell” or make a “sale,” but instead offered promotional activities in marketing Schering Corp’s prescription pharmaceutical products. Thus, these employees were not truly outside sales representatives and hence were not exempt from the requirements of the FLSA for an employer to pay proper overtime wages for hours worked in excess of 40 hours per workweek.

The court also held as unpersuasive several other recent cases in federal courts such as In re Novartis Wage & Hour Litig., 593 F. Supp. 2d 637 (S.D.N.Y. 2009) and Delgado v. Ortho-McNeil, Inc., No. SACV07-0263 (C.D. Cal. Feb. 6, 2009), that ruled in favor of pharmaceutical companies on this very same issue. 

Obviously, this is not the last word on this topic. It is, however, a cautionary tale for all employers that employ “outside salespeople.”  The lesson: title alone will not suffice in the determination of whether an employee will fall under the “outside sales” exemption of the FLSA. Instead, the employee’s actual duties must meet the requirements as set forth in the regulations.   

The FLSA regulations regarding outside salespeople can be found at 29 C.F.R. § 541.500 et. seq.