On July 12, 2011, a federal district court in the Southern District of Florida jumped into the divide over whether pharmaceutical representatives are exempt from the FLSA’s overtime requirements. In Palacios v. Boehringer Ingelheim Pharmaceuticals, Inc., the court granted summary judgment in favor of the plaintiff, holding that she was not properly classified as exempt under either the outside sales or administrative exemptions.
Boehringer employed the plaintiff as a sales representative who called on physicians to encourage them to prescribe Boehringer products to patients. In line with long-standing industry practice, Boehringer classified plaintiff as exempt from overtime pursuant to the FLSA’s outside sales and/or administrative exemptions. In the suit, Boehringer joined the ranks of many pharmaceutical companies who have faced legal challenges to both classifications in recent years. The results have been mixed on both exemptions, creating a split among the circuits.
In 2010, the Second Circuit, relying on a friend of the court brief filed by the U.S. Department of Labor, held that neither the outside sales nor administrative exemptions applied to representatives of Novartis Pharmaceutical Corp. With respect to the outside sales exemption, the Second Circuit ruled that the representatives were not making “sales” because federal law prohibits them from actually selling pharmaceuticals. Subsequently, however, the Ninth Circuit rejected that “rigid, formalistic interpretation” of the term “sales” and focused on the similarities between SmithKline Beecham Corp.’s representatives and other traditional salespersons.
Courts have also disagreed as to the application of the administrative exemption to pharmaceutical representatives. The Second Circuit rejected use of the administrative exemption, finding that Novartis’ representatives did not exercise the requisite “discretion and independent judgment on matters of significance” ecause they were tasked with delivering the company’s core messages to physicians without deviation. On the other side of the divide, however, the Third Circuit held that representatives for Johnson & Johnson and Astra-Zeneca qualified for the administrative exemption because they worked without direct oversight and were expected to formulate strategic plans to increase sales within their assigned territory. Further, the Third Circuit readily found that the representatives’ marketing work is “directly related to the “management or general business operations” of the employer.
In Palacios, the district court first addressed the outside sales exemption, holding that under the FLSA regulations, “sales” requires “the transfer of title” and because the plaintiff could not actually transfer title or even take orders she was not engaged in sales. Rather, she was performing non-exempt promotional work incident to sales made by others in the company. The Palacios court rejected the Ninth Circuit’s practical application of the term “sales” to the highly-regulated pharmaceutical industry and disputed the notion that securing a physician’s commitment to prescribe a particular product is akin to a “sale.”
Perhaps more troubling for the industry than the court’s literal read of the term “sales,” however, is its application of the administrative exemption. On that front, the Palacios court held that the plaintiff was merely carrying out “day-to-day business affairs” and not work directly related to the management or general business operations of the company, such as marketing -- which is arguably the most apt description of plaintiff’s work if it cannot be called sales given the legal framework of the industry. Although the court detailed examples of administratively exempt work from the FLSA regulations, including marketing, its decision on the administrative exemption was ultimately grounded in the language of the outside sales exemption. Indeed, the court held that plaintiff’s work in calling on physicians was non-exempt promotional work.
The court further held that plaintiff also was misclassified as administratively exempt because she did not exercise sufficient discretion and independent judgment on matters of significance. Contrary to the Third Circuit, the Court concluded that the plaintiff was merely using “skill” to apply established techniques and procedures. To reach that conclusion, the court centered its analysis of illustrative examples and factors set forth in the regulations, rather than on the FLSA’s core definition of discretion and independent judgment -- comparing and evaluating possible courses of conduct and then making a decision.
While not binding outside of the Southern District of Florida, the Palacios court’s decision offers additional ammunition to other pharmaceutical representatives pursuing misclassification suits. Even so, the decision is susceptible to reversal by the Eleventh Circuit, which has thus far not weighed in on the exempt status of pharmaceutical representatives. In addition, the court’s decision was tailored to the specific factual record presented on the individual plaintiffs’ claims and therefore is readily distinguishable. Indeed, the court itself noted that the facts before it bearing on the administrative exemption were unlike those presented to the Third Circuit in Johnson & Johnson because the plaintiff in Palacios did not manage a territory. The decision therefore is unlikely to significantly alter pharmaceutical companies’ ability to assert the administrative exemption in misclassification cases involving pharmaceutical representatives.