Sep 13, 2010

Payment of Pharmaceutical Sales Representatives Under the Fair Labor Standards Act

Recently, a federal appeals court held in two separate cases that pharmaceutical corporations’ sales representatives were not exempt from the overtime requirements of the Fair Labor Standards Act (“FLSA”) and were, therefore, owed time-and-one-half their regular rate of pay for all hours worked over 40 in a work week. The decisions have far reaching implications to pharmaceutical companies that classify their sales representatives as exempt “outside sales” or “administrative” employees.

Under the FLSA, employees who qualify as exempt “outside sales” or “administrative” employees are not entitled to overtime compensation. An employee qualifies for the “outside sales” exemption if (a) the employee’s primary duty involves (i) making sales, or (ii) obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer, and (b) the employee is “customarily and regularly engaged away from the employer’s place or places of business in performing such primary duty.” The promotion of a product, without more, does not qualify as “sales.”

Federal law prohibits pharmaceutical companies from selling prescription drugs directly to patients and prohibits physicians from giving a binding commitment to prescribe such drugs to patients. Therefore, the defendant company’s representatives attempted to persuade physicians to voluntarily prescribe the drugs to patients, who would then purchase the drugs from pharmacies. The Court held that such activity did not qualify under the “outside sales” exemption of the FLSA, stating that “a person who merely promotes a product that will be sold by another person does not … make the sale.”

The Court also held that the sales representatives did not qualify for the “administrative” exemption to the overtime requirement. To be an exempt “administrative” employee, an employee must, among other things, have a “primary duty” that involves “the exercise of discretion and independent judgment with respect to matters of significance.” Although the defendant company’s sale representatives were required to meet and develop a rapport with physicians, answer product questions, and attempt to persuade physicians to prescribe their products, the Court held that such skills were “exercised with severe limits imposed by” the employer. The representatives had no role in planning the marketing strategy or formulating the “core messages” they delivered to physicians, and they were strictly supervised with respect to the number of physician visits they made, the drugs they promoted, and the promotional events they planned. Therefore, the Court held that they “did not exercise discretion and independent judgment with respect to matters of significance.”

This Court’s decisions effectively prevent pharmaceutical “sales” representatives who market primarily to physicians from being classified as exempt “outside sales” employees. The decisions also establish a high standard for sales representatives to be classified as exempt “administrative” employees.

If you have questions regarding compliance with the Fair Labor Standards Act, please do not hesitate to contact your employment counsel at Smith, Gambrell & Russell, LLP.

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