Seventh Circuit Applies FLSA’s Administrative Exemption to Pharmaceutical Sales Representatives
The United States Court of Appeals for the Seventh Circuit has held that two pharmaceutical companies did not violate the Fair Labor Standards Act (FLSA) by failing to pay overtime to their sales representatives, concluding that the FLSA’s “administrative exemption” from the statute’s overtime requirements was applicable to these employees. Although the Court’s opinion focused on the job duties of pharmaceutical sales representatives (PSRs), the Court’s analysis of the general scope of the administrative exemption may prove useful to employers in other industries.
Sales representatives of Eli Lilly (Lilly) and Abbott Laboratories (Abbott) brought separate actions in Federal District Courts in Indiana and Illinois, respectively, alleging that their employers had failed to pay overtime wages in violation of the FLSA. Both companies raised, as defenses, the FLSA’s administrative and outside sales exemptions. See 29 U.S.C. 213(a)(1). The District Court hearing the case brought by the Lilly employees held that both exemptions applied to PSRs, whereas the District Court hearing the case brought by the Abbott employees concluded that neither exemption applied. The Seventh Circuit consolidated the two cases for purposes of its opinion. See Schaefer-LaRose v. Eli Lilly & Co. and Jirak v. Abbott Laboratories, Inc. The U.S. Department of Labor (DOL) appeared as amicus curiae, taking the position that neither exemption applied to PSRs.
The Seventh Circuit’s Decision
The Seventh Circuit noted that the primary work of PSRs is to call upon physicians to persuade them to write prescriptions for their employer’s pharmaceutical products. Focusing on the administrative exemption, the Court cited to the three requirements that must be met for the exemption to apply as set forth in DOL regulations: (1) the employee must be compensated at a rate of not less than $455 per week, (2) the employee’s “primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers,” and (3) the employee’s “primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.” 29 C.F.R. § 541.200(a). It being conceded that all plaintiffs were sufficiently compensated as required by the regulations, the Court first addressed the “directly related” issue. The Court noted that, according to the DOL’s regulations, work directly related to the management or general business operations of the employer is work “assisting with the running or servicing of the business as distinguished from working on a manufacturing line or selling a product in retail or service establishment” and includes activities such as advertising, marketing and promoting sales. The Court concluded that the PSRs satisfied this criteria because they “neither produce the employers’ products nor generate specific sales, but service the production and sales aspects of the business by communicating the employers’ message to physicians. The goal of their work is to increase market share indirectly or, stated differently, to promote sales.” The Court noted plaintiffs’ argument that each PSR was responsible for interacting with only a limited number of physicians, but held that the actual wording of the regulations did not support the plaintiffs’ position that the administrative exemption is limited to “higher level employees” with greater responsibilities than those of PSRs and with involvement in the overall sales, marketing and promotional policies of the company.
Turning to the “exercise of discretion” requirement, the Court, while recognizing that PSRs were constrained by government regulations about what they could and could not say about their company’s products, found that the representatives were required to exercise a significant measure of discretion and independent judgment. In this regard, the Court noted two other Federal Appellate Courts had divided on the issue, with the Second Circuit deciding that PSRs do not exercise sufficient discretion for the administrative exemption to apply , but with the Third Circuit reaching the opposite conclusion. In finding that PSRs do possess the required discretion, the Seventh Circuit noted, among other things, that the representatives are sent into physicians’ offices with minimal supervision and have a fair amount of discretion in terms of what approach to take with a given physician in a given circumstance. Furthermore, PSRs are not treated as “simple mouthpieces, reciting scripts,” but have been given extensive education and training in their company’s products in order to tailor their conversations to the particular circumstances of each physician and to intelligently discuss the concerns and objections raised by the physicians. Thus the Court concluded that the PSR position entailed a sufficient amount of discretion and judgment for the administrative exemption to apply and, accordingly, that the defendant employers were not liable for unpaid overtime.
Critical to the Court’s determination was its view of the DOL’s regulations pertaining to the discretion issue, not as a “checklist” of factors, some number of which had to be present before the exemption would apply, but simply as a guide. In this regard, the Court stressed that “the determination of discretion is a circumstance-specific one that will look different from industry to industry.”
Because the Court’s holding with regard to the administrative exemption was dispositive of plaintiffs’ overtime claims, the Court did not reach the issue of whether the outside sales exemption also applied and noted that that issue is currently before the Supreme Court in a case from the Ninth Circuit.
In considering whether the administrative exemption applied to PSRs, the Seventh Circuit took a pragmatic, rather than a rigid, approach to the interpretation of the DOL regulations setting forth the parameters of the exemption. The exemption is clearly not limited to “higher level” employees, and the Court’s flexible approach to the “discretion” regulations would appear to be transferable to positions related to marketing, promotion and customer service beyond the pharmaceutical industry. If you have any questions regarding the application of any of the FLSA’s overtime exemptions or related issues, please feel free to contact any of the attorneys in the Gibbons Employment & Labor Law Department.