Pharmaceutical Sales Representatives Covered by FLSA's Administrative Exemption: Seventh Circuit

Practical Law Legal Update 0-519-4007 (Approx. 5 pages)

Pharmaceutical Sales Representatives Covered by FLSA's Administrative Exemption: Seventh Circuit

by PLC Labor & Employment

Key Litigated Issues

The US Court of Appeals for the Seventh Circuit issued an opinion in Schaefer-LaRose v. Eli Lilly & Co. on May 8, 2012. The key litigated issues were whether pharmaceutical sales representatives were exempt from overtime requirements under the FLSA's administrative or outside sales exemptions.

Background

The plaintiffs, pharmaceutical sales representatives for Eli Lilly & Co. and Abbott Laboratories, brought suit against their employers in separate cases claiming they were misclassified as exempt employees under the FLSA and were therefore improperly denied overtime pay.

The US District Court for the Southern District of Indiana granted Eli Lilly's motion for summary judgment, finding pharmaceutical sales representatives were exempt from the FLSA's overtime requirements under both the administrative and outside sales exemptions. By contrast, the US District Court for the Northern District of Illinois granted summary judgment for the plaintiffs in the case against Abbott Laboratories, finding the plaintiff pharmaceutical sales representatives were not exempt under either exemption.

On appeal, the Seventh Circuit consolidated both cases.

Outcome

The Seventh Circuit found that pharmaceutical sales representatives qualified as administrative employees and were therefore exempt from the FLSA's overtime requirements. Given its decision on the administrative exemption, the court did not reach the outside sales exemption issue. That issue is presently pending before the US Supreme Court.

Employees must meet a three-prong test to qualify as administrative employees exempt from overtime requirements. These employees must:

Be compensated on a salary or fee basis of at least $455 each week, not including board, lodging or other facilities.
Primarily perform office or non-manual work directly related to the employer's management or general business operations.
Exercise discretion and independent judgment on significant matters.

The parties agreed that the pharmaceutical sales representatives met the first prong of the test. On the second prong, the court found that the representatives' work was directly related to the pharmaceutical companies' general business operations, as the representatives:

Were the principal, ongoing face of the companies to the medical community in a unique position to make or deny a viable market for the companies' products.
Did not make individual sales to doctors, but serviced the businesses' production and sales divisions by communicating the companies' respective messages.
Were one of the principal means by which physicians could give feedback to the companies on the products' actual effectiveness and limitations.

The third prong of the test, the exercise of discretion and independent judgment, was a question of first impression in the Seventh Circuit as applied to pharmaceutical sales representatives. The court considered In re Novartis Wage and Hour Litigation, where the US Court of Appeals for the Second Circuit found pharmaceutical sales representatives did not exercise discretion but merely applied their skills within severe limits imposed by the employer, and therefore did not qualify as administrative employees.

In Smith v. Johnson & Johnson, by contrast, the US Court of Appeals for the Third Circuit focused on the plaintiff's day-to-day duties to find the plaintiff was an administrative employee exercising discretion.

The Seventh Circuit also focused on the representatives' day-to-day duties and found, like the Third Circuit, that the representatives exercised a significant measure of discretion and independent judgment, noting they:

Went to doctors' offices under minimal supervision by their employees to speak with doctors, who were in the most direct position to determine whether the companies' products had a viable market.
Tailored their message to the individual circumstances, rather than simply following a script from their employers.
Were trained extensively, which suggested their companies understood the representatives needed a solid understanding of the underlying message.
Were given specific call plans that identified which doctors should be visited, but deviated from these plans where necessary to call on others they felt could influence prescribing patterns.
Spent most of their time unsupervised.

The court noted that the determination of discretion is highly circumstance-specific and will differ from industry to industry.

Practical Implications

The decision establishes the Seventh Circuit's position that pharmaceutical sales representatives are administrative employees exempt from the FLSA's overtime requirements. The decision also provides another potential exemption for the pharmaceutical industry to rely on if the Supreme Court rules the outside sales exemption does not apply in the pending case, Christopher v. SmithKline Beecham Corp.

For more information on exemptions under the FLSA, see Practice Note, Wage and Hour Law: Overview: The Fair Labor Standards Act: Overview.

For more information on wage claims generally, see Wage and Hour Claims Toolkit.

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