Are your overtime pay policies in compliance with the law?  The U.S. Court of Appeals for the Second Circuit ruled earlier this month that Novartis Pharmaceuticals Corp.’s (NPC’s) policy in regard to its pharmaceutical representatives (Reps) is not, and these employees are entitled to receive overtime payments if they work more than 40 hours in a workweek.  Below is a brief synopsis of the Court’s decision.

Plaintiffs, pharmaceutical representatives, appealed a District Court’s Order granting Defendant, NPC summary judgment and holding that Plaintiffs were exempt from the overtime provisions of the Fair Labor Standards Act (FLSA) under both the outside sales exemption and the administrative sales exemption.  The Second Circuit reversed this Order and held that, based on their duties, the Plaintiffs were neither outside sales exempt nor administrative sales exempt.

Discussing the outside sales exemption first, the Court began its analysis by finding that the Department of Labor Secretary’s interpretations of her regulations are entitled to “controlling deference” and the Secretary’s position as amicus in this appeal was entirely consistent with the regulations.  Additionally, the Court refused to conclude that the regulations constitute an erroneous interpretation of the FLSA’s definition of “sale” to “include [ ] any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.” Stating that although the phrase “other disposition” is a catch-all that could have an expansive connotation, the Court found no error in the regulations’ requirement that any such “other disposition” be “in some sense a sale.”

Next, the Court noted the undisputed sales path taken by Novartis pharmaceuticals:  Novartis sells its drugs to wholesalers; the wholesalers then sell them to pharmacies; and the pharmacies ultimately sell the drugs to patients who have prescriptions for them.  The Representatives merely promote the drugs to the physicians, but do not speak to the wholesalers, pharmacies, or patients.  The Court also found that there was no dispute as to what occurs during the Reps’ “sales” calls with physicians:  The meetings are brief-generally less than five minutes-and the physicians neither buy pharmaceuticals from the Reps nor commit to buying anything from the Reps or from Novartis. The Reps may give physicians free samples, but the Reps cannot transfer ownership of any quantity of the drug in exchange for anything of value.   In light of these undisputed facts, the Court concluded that the physician is an essential step in the path that leads to the ultimate sale of a Novartis product to an end user, a patient cannot purchase the product from a pharmacy without a prescription, and it is the physician who must be persuaded that a particular Novartis drug may appropriately be prescribed for a particular patient. Upon application of these facts to the Secretary’s regulations, the Court found that when an employee promotes to a physician a pharmaceutical that may thereafter be purchased by a patient from a pharmacy if the physician-who cannot lawfully give a binding commitment to do so-prescribes it, the employee does not in any sense make the sale.

Novartis also argued that the Reps “make sales in some sense” because “they are responsible for eliciting commitments from the physicians on whom they call to write prescriptions for NPC drugs and that these prescriptions are, in essence, orders for NPC drugs to be used by the patients in purchasing the drugs from pharmacies.”  But the Court concluded that Novartis’s reliance on the word “commitments,” did not lead to a conclusion that the Reps make sales, as it ignored the nature of the “commitment” expressly envisioned by the Secretary in enacting the regulations: “a commitment to buy.” The Court found that the type of “commitment” the Reps seek and sometimes receive from physicians is not a commitment “to buy” and is not even a binding commitment to prescribe.

In sum, where the outside sales rep merely promotes a pharmaceutical product to a physician without the ability to transfer nothing more than free samples to the physician and cannot lawfully transfer ownership of any quantity of the drug in exchange for anything of value, cannot lawfully take an order for its purchase, and cannot lawfully even obtain from the physician a binding commitment to prescribe it, this Court concluded that it is not plainly erroneous to find that the employee has not in any sense, within the meaning of the statute or the regulations, made a sale.

The Court also rejected the lower Court’s holding that the Plaintiffs were administratively exempt, finding that these “Reps” did not exercise independent discretion and judgment. Novartis, in contending that the Reps exercise discretion and independent judgment, argued that the Reps perform the following primary duties:

•  “determine how best to develop a rapport with a physician and develop strategies to engage physicians in an interactive dialogue to draw out their patient concerns, treatment styles and predilections”;
•  “be able to react to expressed physician concerns by emphasizing particular clinical findings regarding the efficacy and safety of NPC’s drugs for specific patient types”;
• “determine when and how to deliver the [Novartis-determined core] message, taking into consideration,” e.g., “the prior call history with each physician, the physician’s time constraints, expressed concerns, prescription-writing tendencies and patient population”; and
• “determine how best to close each call by evaluating whether sufficient groundwork has been laid to seek the physician’s commitment on that call to write prescriptions.”

In comparing these Reps’ primary duties against the illustrative factors set out in 29 CFR § 541.202(b), the Court found no evidence in the record:

• that the Reps had any authority to formulate, affect, interpret, or implement Novartis’s management policies or its operating practices,
• that they are involved in planning Novartis’s long-term or short-term business objectives,
• that they carry out major assignments in conducting the operations of Novartis’s business,
• that they have any authority to commit Novartis in matters that have significant financial impact.

The Court also rejected Novartis argument that the Reps do commit Novartis financially when they enter into contracts with hotels, restaurants, and other venues for promotional events, “which may cost NPC thousands of dollars” because the record revealed that the Reps had been given budgets for such events by the Novartis managers and that the Reps had no discretion to exceed those budgets. Nor did it find any evidence that the Reps had authority to negotiate and bind Novartis on any significant matters, or had authority to waive or deviate from Novartis’s established policies and procedures without its prior approval. In light of the controls to which Novartis subjects the Reps, the Court rejected the assertions advanced by Novartis and concluded that the Reps are not sufficiently allowed to exercise either discretion or independent judgment in the performance of their primary duties.

Although the Second Circuit’s decision is not legally binding in other Circuits, its “controlling deference” to the Secretary’s interpretations of the FLSA regulations may result in other Circuit Court’s adoption of the same analysis and reasoning.  Thus, this decision could impact companies’ outside sales representatives’ duties and alter the way companies compensate their outside sales representatives.  If you have any questions regarding your employee classifications, please contact one of the members of the firm’s labor and employment section group.