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On Valentine’s Day, however, the Ninth Circuit (AZ, CA, ID, MT, NV, OR, and WA) gave the pharmaceutical industry some candy by coming to the opposite conclusion, deciding that pharmaceutical sales representatives are exempt from the overtime pay regulations and therefore do not need to be paid overtime wages.

How can two courts look at the same statute and regulations and come to diametrically opposed conclusions? The answer lies in the fact that “sales” in the pharmaceutical industry are a multi-step process. A pharmaceutical sales rep courts doctors, trying to convince them to recommend the medications made by the company they represent. However, the doctor him- or herself does not actually buy the pharmaceuticals, since the doctor is not the end user.

Under the Fair Labor Standards Act (FLSA), overtime is the default—everyone is assumed to get it unless they fall under one of the exemptions to the overtime regulations. Outside sales people who show up at a place of business to pitch their products may fall under the “outside sales representative exemption.”  This exemption requires, among other things, that the employee’s primary duty be “making sales.” That’s where the two Circuit courts disagreed.

The Second Circuit looked at the fact that the pharmaceutical sales rep does not actually close sales. The sale itself is made later, by another person (a patient or institutional buyer), and placed with someone at the company other than the sales rep who’d made the sales call. The Second Circuit concluded that the pharmaceutical sales rep doesn’t actually make sales, but rather are engaging in a form of marketing or promotion, making the outside sales exemption unavailable and not finding that any other exemption applied.

The Ninth Circuit recently approached this differently and focused on how sales are made in the pharmaceutical industry. Pharmaceutical companies can’t sell prescription medication directly to patients. Sales are made by convincing doctors to recommend or prescribe them. In addition, that court considered that pharmaceutical sales reps are paid and incentivized by commission; work in the field; and show products to those who influence a sale. In short, the Ninth Circuit felt that in reality these reps are sales representatives, selling products the only way their industry is legally allowed to sell.

Look for this matter to end up before the Supreme Court, to resolve this clash between Circuits—it can’t remain the case that whether an employee receives overtime or not under federal law depends on where the employee is situated.

In the meantime, this situation highlights that even what seems to be straightforward—whether a job category falls under a particular overtime exemption—often is not. When there is any doubt whatsoever, employers should consult with counsel to help navigate the rocky shoals of the FLSA and its implementation.
 

In this decision, that Second Circuit found that sales representatives were not exempt under the FLSA because they did not actually engage in sales activities. First, the Court found that the salespeople were promoting sales of other, not making sales themselves. Thus, these employees primary duty was not making sales away from the employer’s place of business.

Similarly, the Court found that the sales representatives only performed low level marketing functions. Even though they had some authority to enter into agreements which bound Novartis and had some discretion, the Court found the employees’ duties were not sufficient to make them exempt administrative employees under the FLSA.

This mirrors a similar decision we discussed in April of 2009 against Schering Corporation. The results of these decisions are significant. Given the relatively high pay of these employees, even a few years of overtime could add up to hundreds of thousands of dollars for each employee.

Pharmaceutical companies are not alone. Many industries widely misapply the outside sales and administrative exemptions, and they face similar exposure to overtime liability.
 

A recent Second Circuit decision reaffirms the above. The Court found that a Regional Director of Sales could be entitled to overtime in those weeks that she worked over 40 hours. Even though the employer tried to argue that she was an exempt administrative employee, the court found that her primary duty was making sales and not marketing activities. As a result, she could not be an exempt administrative employee and could therefore maintain her claims for overtime.

This decision emphasizes the need for employers to carefully examine the overtime eligibility of their sales staff. If the sales staff does not fit into one of the limited sales categories that are not entitled to overtime, it is very difficult for commissioned salespersons to fit into the other white collar exemptions.