In a decision that bolsters the pharmaceutical industry, a federal appeals court has ruled that sales reps are not eligible for overtime pay. In doing so, the court also rejected the position taken by the US Department of Labor, which has filed briefs in numerous cases supporting the notion that sales reps are entitled to overtime. The ruling by the Seventh Circuit Court of Appeals combined cases involving reps who worked for Eli Lilly and Abbott Laboratories.
Whether sales reps are, in fact, entitled to overtime pay has been a closely watched and controversial topic. The debate has divided courts around the country for the past few years and the outcome has the potential to alter compensation for tens of thousands of industry employees who promote medicines. The US Supreme Court, in fact, is reviewing such a case and a decision is expected in late June (more on that later).
The key issue in the litigation has been whether sales reps are exempt from overtime provisions of the Fair Labor Standards Act. The FLSA overtime compensation requirement does not apply to employees who work as outside salespeople, but the law does require employers to pay overtime for hours worked beyond 40 hours a week, unless a FLSA exemption applies. And there are two exemptions.
One is the outside sales exemption: if an employee’s primary duty is to obtain orders or contracts (as defined by the statute) and regularly does so away from the employer’s place of business. Reps argue a direct sale doesn’t occur because drugs are actually purchased by patients and hospitals, which buy meds from wholesalers. They also insist they follow a script. Drugmakers argue reps are, indeed, outside salespeople who close sales because the primary customer is a physician.
There is also the administrative exemption, which relieves employers from paying overtime to any employee who is employed in a bona fide executive, administrative, or professional capacity – and to employees earning over $455 a week whose primary duty is to perform office or non-manual work involving managerial or general business matters. A primary duty includes exercising discretion and independent judgment.
The federal appeals court did not address the outside sales exemption, because the Supreme Court is reviewing that issue. That case involves two former GlaxoSmithKline reps, who were unable to convince a different federal appeals court - the Ninth Circuit - that they were entitled to overtime (see this and this). Last year, by the way, the Second Circuit ruled that Novartis reps are entitled to overtime (back story).
And so, the Seventh Circuit restricted its review in the case involving the former Lilly and Abbott reps to the administrative exemption. In reaching its decision, the court acknowledged that the physicians do not actually buy medications from reps, given that the pharmaceutical industry is tightly regulated. But the court did find that the administrative exemption applies.
"The representatives before us are the public face of their employer to the most important decisionmaker regarding use of their companies’ products, the prescribing physicians. The representatives neither produce the employers’ products nor generate specific sales, but service the production and sales aspects of the business by communicating the employers’ message to physicians.
"The goal of their work is to increase market share indirectly or, stated differently, to promote sales. To the maximum extent possible, their work is based on maintaining continuous and regular contact with the physicians to whom they are assigned, anticipating their objections and concerns and addressing them on behalf of their employers," the court wrote (here is the decision).
In other words, reps are like bona fide administrators who promote product, and the court also ruled that they really do exercise discretion when deciding how to deal with physicians. In reaching this conclusion, the appeals court also declined to show deference to the Labor Department, which has argued in briefs in various cases that the courts should defer to its interpretation of applicable statutes and rules.
"To the extent that the plain language of the Department's regulations are deemed ambiguous, controlling deference must be given to the department's interpretation of its own regulations unless such interpretation is plainly erroneous or inconsistent with the regulations," the Labor Department wrote in a brief filed in support of the former Lilly rep (you can read it here).
Where to from here? "If (the Supreme Court) rules that (sales reps) are outside sales exempt, (this decision) will have relatively small consequences for pharma industry," says Richard Alfred, a labor and employment attorney who has represented various drugmakers in overtime lawsuits involving sales reps. "If (the court) rules that reps are not outside sales, then the 7th Circuit decision - joining the 3rd Circuit in finding the administrative exemption applicable to reps - will have major implications for the dozens of pharma cases pending and to be filed."
In other words, if the Supreme Court rules in favor of Glaxo, the issue is over - reps will not be entitled to overtime because "all reps will be exempt everywhere," says Eric Kingsley, one of the attorneys for the Lilly and Abbott reps. But if the Supreme Court decides in favor of the former Glaxo reps, then the debate over the administrative exemption will likely continue. He adds that an appeal of the 7th Circuit decision is being discussed.