Pharmaceutical Sales Reps Fall Within FLSA Exemption

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GlaxoSmithKline pharmaceutical sales representatives (PSRs) cannot recover overtime pay under the Fair Labor Standards Act because they fall within the FLSA's “outside salesmen” exemption, the U.S. Court of Appeals for the Ninth Circuit ruled Feb. 14 in an issue of first impression for the circuit (Christopher v. SmithKline Beecham Corp. d/b/a GlaxoSmithKline, 9th Cir., No. 10-15257, 2/14/11).

In reaching its holding, and creating a circuit split, the Ninth Circuit declined to award deference to an amicus brief filed by the secretary of labor on behalf of the sales representatives (28 HRR 901, 8/23/10). The Labor Department's brief was similar to one it submitted in a case in which the Second Circuit agreed with the secretary's position that PSRs do not meet the requirements of the outside salesmen exemption (In re Novartis Wage & Hour Litigation, 611 F.3d 141, 16 WH Cases2d 481 (2d Cir. 2010); 28 HRR 746, 7/12/10).

Reps Sought Overtime Wages.

According to the court, Glaxo employs PSRs to attempt to convince physicians in their assigned geographical areas to prescribe medications manufactured by the company. To perform these duties, PSRs spend “much of their time” outside of Glaxo offices.

Glaxo provides PSRs, who generally have prior sales experience, with training on how to make persuasive presentations to doctors, as well as sample products for distribution. Generally, a PSR's total compensation is approximately 75 percent salary and 25 percent incentive compensation, which is paid “if Glaxo's market share for a particular product increases in a PSR's territory, sales volume for a product increases, sales revenue increases, or the dose volume increases,” the court said.

Glaxo sales representatives Michael Christopher and Frank Buchanan sued the company in August 2008, alleging that they and a class of similarly situated PSRs were not paid overtime wages in violation of the FLSA when they worked 10 to 20 hours in excess of 40 hours per week. The U.S. District Court for the District of Arizona ruled for Glaxo, finding the PSRs exempt as “outside salesmen” under the FLSA.

Affirming, the Ninth Circuit found that Glaxo met its burden of showing the FLSA's outside salesman exemption at 29 U.S.C. § 213(a)(1) applies to PSRs who forge relationships with physicians “for the purpose of driving greater sales.”

The court pointed out that DOL's regulations at 29 C.F.R. § 541.500(a) define an “outside salesman” as an employee “whose primary duty is … making sales within the meaning of section 3(k) of the [FLSA] … and … who is primarily and regularly engaged away from the employer's place or places of business in performing such primary duty.”

Section 3(k) of the FLSA (29 U.S.C. § 203(k)) and its implementing regulations at 29 C.F.R. § 541.501(b) define the word “sale” or “sell” to include “any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.”

The appeals court rejected the sales representatives' argument that they merely promote Glaxo's products, and do not sell them because they do not transfer any medications to physicians. Instead, the Ninth Circuit agreed with Glaxo that the phrase “other disposition” in FLSA Section 3(k) is a “broad catch-all category” by which an employee is a sales person if he or she “in some sense make[s] a sale.”

“Plaintiffs suggest that despite being hired for their sales experience, being trained in sales methods, encouraging physicians to prescribe their products, and receiving commission-based compensation tied to sales, their job cannot 'in some sense' be called selling,” the court said. “This view ignores the reality of the nature of the work of [PSRs], as it has been carried out for decades.”

In the pharmaceutical industry, the court said, the “sale” is the “exchange of non-binding commitments between the PSR and physician” by which “the manufacturer will provide an effective product [that] the doctor will appropriately prescribe.”

“[T]he record reveals that binding or non-binding, a physician's commitment to a PSR is nevertheless a meaningful exchange because pharmaceutical manufacturers value these commitments enough to reward a PSR with increased commissions when a physician increases his or her use of a drug in the PSR's bag,” the court held.

No Deference to DOL's Amicus Brief.

The Ninth Circuit declined to give “controlling” deference to an amicus brief filed by the labor secretary on behalf of the sales representatives.

In its brief, DOL argued that “when an employee promotes to a physician a pharmaceutical that may thereafter be purchased by a patient from a pharmacy … the employee does not in any sense make the sale” for the outside salesmen exemption to apply.

Following the U.S. Supreme Court's decision in Gonzales v. Oregon ( 546 U.S. 243 (2006)), the Ninth Circuit said, “an agency does not acquire special authority to interpret its own words when, instead of using its expertise and experience to formulate a regulation, it has elected merely to paraphrase the statutory language.”

Here, such “parroting” is present in DOL's interpretation of FLSA Section 3(k), the court said.

By Jay-Anne B. Casuga

Text of the decision can be accessed at