Client Alert

Virtually every big pharma company has been or is being sued for allegedly violating the Fair Labor Standards Act (“FLSA”) and applicable state wage and hour laws in class or “collective” actions brought by former and/or current drug company sales representatives. The dispute focuses on the meaning of “outside sales employees” under the FLSA, an exemption established under 29 CFR §§ 541.500 & 541.702 of the FLSA regulations, with drug reps claiming that their job duties never actually include a "sale," thus rendering the exemption inapplicable.¹

Currently, three reported decisions on pharma employee’s exempt status under the outside sales exemption have been rendered by the United States District Court for the Central District of California, each resulting in summary judgment for the employer on the basis that the drug reps’ work is designed to produce a sale and holding that the outside sales exemption applies to the employees. However, all of these decisions are now on appeal to the Ninth Circuit and this litigation is a wake up call to big pharma nationwide; in similar situations2, plaintiffs’ counsel have likewise targeted an industry for FLSA violation claims, bringing multiple suits against that market sector’s leaders. There is no reason to expect a different approach in this case, so a review of the regulatory background appears in order.

The general rule for “outside sales employees” is that the employee’s primary duty is

(i) making sales within the meaning of section 3(k) of the [FLSA], 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.

29 CFR 541.500(a)(1). The exemption further requires that the employee “customarily and regularly” be engaged in this primary duty away from the employer’s place(s) of business. 29 CFR 541.500(a)(2). “Sales” applies to services as well as commodities, and is defined to include “any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.” 29 CFR 541.501(b). Drug reps argue that they themselves are never part of a “sale” of the products they promote since they only interact with physicians, not with the ultimate purchaser of their products - patients - who take the prescription received from their physician to a pharmacy for filling and purchase. These layers of people and companies, drug reps assert, render the exemption inapplicable to the drug reps, allowing them to seek overtime wages for their otherwise uncompensated long hours.

Unsurprisingly, big pharma employers have disagreed, arguing that drug reps are hired for sales-based positions, based on their past sales experience and training, and paid according to commissions reflective of the total amount of the products sold in the rep’s territory or region. So far, Bayer Corp., Wyeth, and Roche Labs have won these arguments³, with the courts’ concluding that the physicians are not the ultimate purchasers; instead, say these holdings, the physicians control the product’s purchase through their prescriptions and are appropriate sales targets and “customers” of the pharmaceutical companies. To hold otherwise, the Wyeth court reasoned, would result in concluding that Wyeth did “not engage in any sales activity regarding its prescription products merely because its efforts are rationally aimed at those determining the product’s purchase rather than the directed buyers of the product.”

These cases are not clear cut, however, and have required that reviewing judges adopt a more flexible reading of the FLSA and its regulations. Rather than focusing on an “actual sale” as the product of the employee’s work under the exemption language, judges have looked to the purpose behind the employee’s work, which has been to increase drug sales for their employer. Since drug companies are not legally permitted to sell to patients—in fact marketing of drug products is one of the most heavily regulated activities for pharmaceutical companies along with R&D and clinical trials—“actual sales” would never be part of the drug reps’ work. Of course, some future judge may disagree with current decisions and favor the arguments of the plaintiff drug reps, particularly with the oft-times unpredictable Ninth Circuit having a chance to enter this debate; one argument the plaintiffs will be expected to raise is that the courts owe deference to Department of Labor interpretations and should not substitute their judgment for that of the agency which administers the law. Pharmaceutical employers should expect at least one interesting decision out of the Ninth Circuit and others from lower federal courts in the coming months.

An analysis of this topic is the subject of BNA’s Daily Labor Report, Special Report published on March 26, 2008, which includes insights from counsel involved in the cases and an otherwise helpful summary of these issues.

Notes
¹ FLSA exemptions can apply to both overtime and minimum wage requirements or to overtime provisions alone. Common exemptions to the FLSA’s overtime and minimum wage requirements are for executive, administrative, and professional employees, as well as computer-related employees, farm workers, and certain seasonal employees, among others. Drug reps have argued in some of these suits that the administrative exemption should not apply to them.

² Drug company sales rep cases are the newest wave of FLSA suits similar to those brought against the financial services industry involving mortgage lenders and investment dealers. What is unique about these plaintiffs is that they are not the “traditional” FLSA litigants, given their white-collar professions and compensation level. Traditionally, FLSA violations have often focused on low-wage service sector industries, including hospitality, construction, and similar workers, but efforts to change the rules so as to exempt all highly-compensated individuals have failed.

³ The three cases are Barnick v. Wyeth, 522 F.Supp.2d 1257 (C.D. Cal. 10/25/2007); D’Este v. Bayer Corp., C.D. Cal., No. 07-3206, 10/9/07; and Menes v. Roche Labs, Inc., C.D. Cal., No. 07-00702, 1/7/08. 6 DLR A-12, 1/10/08).

If you have any questions regarding this client alert, please contact the Womble Carlyle attorney with whom you usually work or one of the members of our Fair Labor Standards Act Team.

Read more about FLSA issues on the Womble Carlyle FLSA Blog.