An appellate court has ruled that pharmaceutical firms are exempt from paying their sales representatives overtime under the administrative exemption to the Fair Labor Standards Act's overtime requirements.
The 7th U.S. Circuit Court of Appeals in Chicago consolidated two cases in its ruling Tuesday in Susan Schaefer-LaRose vs. Eli Lilly & Co. In the Lilly case, the lower court had ruled in the drug company's favor. In the second case, James Jirak et al. vs. Abbott Laboratories Inc., the lower court had ruled in the employees' favor.
The ruling states that under the FLSA, employees are entitled to overtime pay for any hours worked in excess of 40 hours per week. In both cases, plaintiffs had claimed they were misclassified as exempt employees and denied overtime pay.
Among the exemptions to the FLSA overtime requirements is one that exempts "any employee employed in a bona fide executive, administrative, or professional capacity." The appellate court held in its ruling that the exemption was applicable in both cases.
The "work done by the pharmaceutical sales representative properly is characterized as administrative," a unanimous three-judge panel held. "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," says the decision.
"We therefore conclude that the sales representatives' duty is the performance of work directly related to the general business operations of the employers," which meets one of the requirements for the administrative exemption.
Another requirement is that the sales representatives exercise "discretion and independent judgment," said the court. "Our examination of the records in these cases convinces us that the representatives were required to exercise a significant measure of discretion and independent judgment, despite the constraints placed on them and indeed on all representatives of the pharmaceutical industry, by the regulatory environment in which they must live," said the court.
The appellate court affirmed the lower court's ruling in the Lilly case and reversed the lower court's judgment in the Abbott case.
In a case now before the Supreme Court, Christopher vs. SmithKline Beecham Corp., the court is considering whether pharmaceutical representatives are exempt under another FLSA exemption, for outside salespersons, and whether it agrees with the Department of Labor's position that these representatives are entitled to overtime pay, said Richard L. Alfred, a partner with Seyfarth Shaw L.L.P. in Boston.
Alfred said that regardless of how the Supreme Court rules in the SmithKline case, the 7th Circuit ruling "will be very important to employers in general that rely on the administration exemption in classifying their employees."
The administrative exemption, he said, "is the most frequently relied on exemption of the white collar exemptions" to the FLSA "and the one that is the most difficult to understand, and that raises the most issues for employers and the courts," Alfred said.
The 7th Circuit ruling "provides considerable clarity" on this issue, he said.