Pharmaceutical companies traditionally have classified their sales representatives as “exempt” employees under the Fair Labor Standards Act (FLSA).  The validity of that classification is now under attack by plaintiffs’ counsel and the United States Department of Labor (DOL), and the issue is currently at play in numerous class actions throughout the country.  Obviously, any determination that pharmaceutical sales representatives are not properly “exempt” employees would send shock waves through the pharmaceutical industry, causing a necessary reconsideration of the generally accepted business model. 

In the first federal appellate court decision to address the exemption status of pharmaceutical sales representatives, Smith v. Johnson & Johnson, 593 F.3d 280 (3d Cir. 2010), the Third Circuit Court of Appeals found that Johnson & Johnson’s (J&J) sales representatives satisfied the FLSA’s administrative exemption.  The court concluded that the employees’ duties are “directly related to the management or general business operations of the employer,” as the FLSA requires, because the position is non manual and requires the representatives to form strategic plans with a high level of planning and foresight to maximize sales in their territories. The court also found that the position also satisfies the “exercise of discretion and independent judgment” requirement because nearly all of the duties are carried out without direct oversight.  In fact, the named plaintiff described herself as “the manager of her own business who could run her own territory as she saw fit.”

Notwithstanding the Third Circuit’s decision, the exempt status of pharmaceutical sales representatives is far from settled.  In May 2009, in response to appeals by plaintiffs in three California district court cases, the Ninth Circuit Court of Appeals certified a series of questions to the California Supreme Court aimed at determining—under California law—whether the outside sales or administrative exemptions apply to pharmaceutical sales representatives.  The California Supreme Court declined to accept the questions causing the Ninth Circuit to stay the appeals pending another decision by the California Supreme Court in a case regarding the application of the administrative exemption to insurance claims adjusters.

On February 19, 2010, the Second Circuit held oral argument in a pair of consolidated appeals, In re Novartis Wage & Hour Litigation, 593 F. Supp. 2d 637 (S.D.N.Y. 2009), and Kuzinski v. Schering Corporation, 614 F. Supp. 2d 247, 252 (D. Conn. 2009).  In Novartis, the United States District Court for the Southern District of New York granted summary judgment in the employer’s favor holding that pharmaceutical sales representatives were properly classified as exempt under both the outside sales and administrative exemptions.  In Schering, the District of Connecticut concluded otherwise, holding the outside sales exemption did not apply to pharmaceutical sales representatives, and that genuine issues of fact prevented the entry of judgment on the administrative exemption.  The DOL has also taken a position on these issues.  The agency filed an amicus brief in these appeals in which it argued that pharmaceutical sales representatives do not satisfy the outside sales exemption because they do not “make sales,” nor do they exercise sufficient discretion to qualify for the administrative exemption.

The Third Circuit in Smith noted these appeals and expressly limited its holding to the facts of the case before stating, in a footnote:

Smith's situation is not unique, and cases similar to this one are pending in the Courts of Appeals for the Second and Ninth Circuits. Our opinion, however, focuses on Smith and the specific facts developed in discovery in this case. Consequently, we recognize that based on different facts, courts, including this Court, considering similar issues involving sales representatives for other pharmaceutical companies, or perhaps even for J&J, might reach a different result than that we reach here.

Smith,  2010 U.S. App. LEXIS 2182, at *5, n.1

Meanwhile, sales representatives continue to file putative class actions against pharmaceutical companies claiming they are misclassified as exempt employees. It appears that these cases will be decided narrowly based upon their discrete facts, offering employers little global guidance on the issue.

This entry was written by Robert Wolff.