On May 8, 2012, the U.S. Court of Appeals for the Seventh Circuit held that pharmaceutical sales representatives employed by Eli Lilly & Company and Abbott Laboratories, Inc. were exempt from the overtime requirements under the Fair Labor Standards Act (FLSA) as administrative employees. Schaefer-Larose v. Eli Lilly & Co., 2012 WL 1592552 (7th Cir. May 8, 2012).

The Seventh Circuit based its conclusion on the employers’ evidence that the sales representatives’ primary duty was the performance of non-manual work that supported their employer’s core function —the development and production of pharmaceutical products, and that they exercised discretion and independent judgment in doing so.

With respect to the employees’ primary duty, the Seventh Circuit found:  

  • “the representatives . . . are the principal ongoing representatives of the company to the professional community;”
  • the representatives “ensure, on a continuing basis, that the medical community is fully aware of the potential of the company’s pharmaceutical products;”
  • “the representatives are one of the principal, and perhaps the main, conduit by which physicians provide meaningful feedback to the company;”
  • the representatives are the “public face of their employer to the most important decisionmaker regarding use of their companies’ products, the prescribing physicians.”

With respect to the exercise of discretion and independent judgment, the Seventh Circuit found:

  • “[a]lthough the regulatory constraints of the industry dictate that the representatives must deliver the pharmaceutical companies’ messages with precision, the representatives nevertheless are sent into physicians’ offices with minimal supervision to engage in conversation with the prescribing physicians who, as a practical matter, are in the most direct position to determine whether the companies’ products have a viable market;”
  • the sales representatives “tailor” their messages to the prescribing physicians to respond to the circumstances;
  • the sales representatives were not “simple mouthpieces, reciting scripts.”

The Seventh Circuit concluded that the sales representatives are exempt from the FLSA’s overtime provisions as exempt administrative employees, upheld a district court’s grant of summary judgment to Eli Lilly and reversed the trial court judgment in Abbott.

A more in-depth analysis of the court’s decision follows below.

Consolidated for purposes of appeal, both Schaefer-Larose v. Eli Lilly & Company and Jirak v. Abbott Laboratories, Inc. involved claims by pharmaceutical sales representatives that their employers misclassified them as exempt from the overtime compensation requirements of the FLSA and thus improperly denied them overtime compensation. Both Eli Lilly & Company and Abbott Laboratories argued that the pharmaceutical sales representatives were exempt from the FLSA’s overtime requirements under the administrative and the outside sales exemptions. The Seventh Circuit found that the employees fell within the administrative exemption and as a result, did not address the applicability of the outside sales exemption.

The Administrative Exemption to the FLSA’s Overtime Requirements

The FLSA entitles employees to overtime pay for any hours worked in excess of 40 hours a week unless they fall within one of the various exemptions set forth in the statute. Section 207 of the FLSA exempts “any employee employed in a bona fide executive, administrative, or professional capacity.” 29 U.S.C. § 207. To be employed in an administrative capacity, an employee must meet the following three criteria:

  • “[C]ompensated on a salary or fee basis at a rate of not less than $455 per week, . . . exclusive of board, lodging, or other facilities;”“
  • [P]rimary duty is the performance of office or nonmanual work directly related to the management or general business operations of the employer or the employer’s customers;” and
  • “[P]rimary duty includes the exercise of discretion and independent judgment with respect to matters of significance.”

29 C.F.R. § 541.200. Only the latter two criteria were at issue in the appeal.

“Directly Related”

Addressing the “directly related” prong, the plaintiffs argued that “the exemption was designed for ‘higher level employees’ whose work is targeted at sales, promotional, and marketing policies of the company overall.” The Seventh Circuit rejected the plaintiffs’ argument. Clarifying that the FLSA regulations distinguish between employees involved in “running or servicing of the business” and those who labor “on a manufacturing production line or selling a product in a retail or service establishment,” the court found the pharmaceutical sales representatives’ work supported their employer’s core function—development and production of pharmaceutical products—but was “distinct from it.”

To support its finding that the work of the pharmaceutical sales representatives satisfied the “directly related” prong, the Seventh Circuit pointed to several factors: (1) “the representatives . . . are the principal ongoing representatives of the company to the professional community;” (2) the representatives “ensure, on a continuing basis, that the medical community is fully aware of the potential of the company’s pharmaceutical products;” and (3) “the representatives are one of the principal, and perhaps the main, conduit by which physicians provide meaningful feedback to the company.” According to the circuit court, the representatives were the “public face of their employer to the most important decisionmaker regarding use of their companies’ products, the prescribing physicians.”

“Discretion and Independent Judgment”

Satisfied that the sales representatives satisfied the “directly related” prong, the Seventh Circuit turned to the “discretion and independent judgment” prong. Application of this prong was a question of first impression for the court. The pharmaceutical companies argued that the sales representatives “had a host of core duties committed to their discretion, including determining how to best gain access to particular physicians and managing their limited discretionary budgets.” According to the court, “[i]t is those dayto- day duties on which a proper analysis under the FLSA rests, not merely the parties’ characterizations of those duties as involving discretion or not.”

Recognizing that nature of the regulatory environment in which the pharmaceutical sales representatives operate, the court found that “[a]lthough the regulatory constraints of the industry dictate that the representatives must deliver the pharmaceutical companies’ messages with precision, the representatives nevertheless are sent into physicians’ offices with minimal supervision to engage in conversation with the prescribing physicians who, as a practical matter, are in the most direct position to determine whether the companies’ products have a viable market” (emphasis added). The Seventh Circuit focused on the fact that the sales representatives “tailor” their messages to the prescribing physicians to respond to the circumstances. According to the court, the sales representatives were not “simple mouthpieces, reciting scripts” (emphasis added).

The court pointed to the extensive training of the sales representatives in the areas of disease processes, assigned products, and competitor products. Other factors the court looked to for support include: (1) the “measure of strategic analysis applied to” the sales representatives’ work; and (2) the immense amount of time the sales representatives spent unsupervised. Although the sales representatives were required to keep extensive records, the court found that “neither the fact that management reviews their work nor that they are required to keep . . . records, detracts from the discretion they exercise in the core of their workday.” Accordingly, the court found that the pharmaceutical sales representatives satisfied the “discretion and independent judgment” prong.

Of note, however, the court cautioned “that the determination of discretion is a circumstance-specific one that will look different from industry to industry and position to position.”

Good News for Employers of Sales Representatives

The issue of whether pharmaceutical sales representatives are exempt from the FLSA’s overtime compensation requirements has been hotly contested in recent years. Earlier this year, the U.S. Supreme Court heard oral argument on whether pharmaceutical sales representatives employed by GlaxoSmithKline qualified for the FLSA’s outside sales exemption. Christopher v. SmithKlineBeecham Corp. d/b/a GlaxoSmithKline, No. 11-204 (April 16, 2012). The Seventh Circuit’s decision in Schaefer-Larose may offer some comfort to pharmaceutical companies as they await the Supreme Court’s ruling.