CHICAGO (CN) – Pharmaceutical companies do not have to pay sales representatives overtime, the 7th Circuit ruled, ruling that they qualified for the administrative exemption under the Fair Labor Standards Act.
Two cases, disputes involving global pharmaceutical companies based in Illinois and Indiana, were consolidated before the three-judge appellate panel. The cases posed the question of whether the companies’ sales representatives qualify for the administrative or outside sales persons exceptions to FLSA requirements, under which employers must pay time-and-a-half for hours worked in excess of forty hours per week.
The U.S. District judges had reached opposite conclusions, each relying on cases decided by other circuits.
In the first case, Susan Schaefer-LaRose sued Eli Lilly & Company over her salaried position, which required over forty hours per week. Indiana federal Judge Sarah Evans Barker ruled against Schaefer-LaRose, dismissing the case.
The Illinois case was a class action brought by James Jirak against Abbott Laboratories, Inc. with nearly-identical claims. Judge Ruben Castillo had ruled in favor of Jirak.
The term “sales representatives” differs slightly in the heavily-regulated pharmaceutical industry than in other fields. While federal law and medical ethics requirements prevent the representatives from actually “selling” products to physicians, they are tasked with persuading the physicians to prescribe the products. Pharmaceutical companies sell products to wholesalers, retailers, hospitals, and nursing homes, which can dispense the pharmaceuticals in accordance with a physician’s written prescription.
Both Lilly and Abbott employ sales representatives nationwide, who spend most of their time preparing for, making and documenting sales calls. Representatives use a variety of techniques – including conducting on-site visits, holding lunch meetings, and sponsoring educational presentations – in order to meet with physicians. Many are given a discretionary budget and free samples to distribute.
Over the objections of the Department of Labor, which filed an amicus brief on the plaintiffs’ side, the 7th Circuit found that the representatives qualified for the administrative exception to the FLSA overtime pay requirements. The court declined to rule whether or not they also qualified for the outside sales person exception.
To qualify under the administrative exception, a position must meet three requirements. Neither side disputed that the representatives were salaried workers. The parties disputed, however, whether or not representatives’ work directly related to “management or general business operations” and involved the exercise of “discretion and independent judgment.”
7th Circuit Judge Kenneth Ripple held that the representatives’ work constituted general business operations because of their essential role in promotions.
“The representatives here are the principal ongoing representatives of the company to the professional community that is in a unique position to make, or deny, a viable market for the company’s product. They do not make individual sales of medications, but ensure, on a continuing basis, that the medical community is fully aware of the potential of the company’s pharmaceutical products and that the same community is confident that the company’s products will be effective tools in the practical setting of a medical practice.”
The court also held that the freedom sales representatives have to tailor the companies’ core message to individual physicians constitutes an exercise of “discretion and independent judgment.”
“It is in the core function of the representatives’ duties, the physician office visits, that we see the most important exercise of discretion and professional judgment on their part,” Ripple wrote. “Indeed, although the companies gave the representatives precise wording and materials, they certainly did not treat the representatives as simple mouthpieces, reciting scripts.”
The question of whether the outside sales exemption applies is currently before the Supreme Court, which granted certiorari to Christopher v. SmithKline Beecham Corp on November 28, 2011.
The ruling, if left undisturbed, will save pharmaceutical companies billions of dollars.