Courts to Clarify Classification of Pharmaceutical Sales Representatives as appeared in Employer’s Guide to the Fair Labor Standards Act

In recent years, the alleged misclassification of employees under both federal and state wage and hour laws has been a hotly contested issue and the subject of a great many class actions. To some extent, these cases have proceeded in waves, moving from industry to industry, or position to position.

Much judicial focus these days is on the pharmaceutical industry, with the classification of pharmaceutical sales representatives as exempt employees currently being tested in several venues throughout the country. With a number of inconsistent rulings on this issue, the coming months should bring some clarity to the issue and some guidance to employers in the industry.

At least two federal appeals courts — the 3rd U.S. Circuit Court of Appeals and the 9th U.S. Circuit Court of Appeals — are reviewing whether pharmaceutical sales representatives are properly classified as exempt under the Fair Labor Standards Act (FLSA) or state law. To date, district court decisions on the issue have been as divergent as one could imagine. The courts have focused largely on the application of the FLSA's outside salesperson exemption, under which an employee must have a "primary duty" of "making sales" or "obtaining orders or contracts" to be exempt from overtime compensation (29 C.F.R. §541.500; see ¶370 of the Guide).

Similar Fact Patterns, Different Rulings

Some courts, like the U.S. District Court for the District of Connecticut in Kuzinski v. Schering-Plough Corp., No. 3:07cv233 (D.Conn. 2009), have held that pharmaceutical sales representatives do not fall within the outside salesperson exemption because they do not "make sales" directly to patients — and, in fact, are prohibited from doing so. Instead, the court explained, these persons merely encourage physicians to prescribe certain drugs to their patients.

(Similarly, the U.S. District Court for the Southern District of New York held in Amendola v. Bristol-Myers Squibb, No. 07 Civ. 6088(DLC) (S.D.N.Y. 2008) that pharmaceutical sales representatives are unlikely to qualify for the outside sales exemption. Although the pharmaceutical representatives influence physicians to prescribe particular drugs, and sometimes even obtain nonbinding commitments that they will do so, the pharmaceutical representatives never actually "sell" a product, as the exemption requires, the court ruled (see September 2008 newsletter, p. X).)

Other courts, such as the U.S. District Court for the Western District of Pennsylvania in Baum v. AstraZeneca, No. 3:2007-cv-90 (W.D.Pa. 2009), have taken a less literal reading of "sales" and held that pharmaceutical sales representatives are properly classified as exempt because they are an integral part of the sales cycle for pharmaceuticals.

Highlighting just how little guidance these and other cases on the issue provide, the Kuzinski court granted summary judgment to the employer, and the Baum court denied it, in decisions issued the very same week — despite extraordinarily similar facts.

Decisions Now Under Review

The 3rd Circuit is reviewing the application of the outside salesperson exemption to pharmaceutical sales representatives in Kuzinski.

The 9th Circuit is faced with several appeals pending before it, each dealing with the application of California exemptions, rather than the FLSA's, to pharmaceutical sales representatives. Taking a somewhat unusual approach in D'Este v. Bayer Corporation, 07-56577 (9th Cir. 2009), the 9th Circuit has sought guidance from the California Supreme Court on the application of the outside salesperson and administrative exemption tests after the district court awarded summary judgment to the employer.

In light of the number of actions regarding the classification of pharmaceutical sales representatives, the 9th Circuit certified the following two questions to the California Supreme Court:

1. Does a pharmaceutical sales representative qualify as an "outside salesperson" under applicable California law if the pharmaceutical sales representative spends more than half the working time away from the employer's place of business and personally interacts with doctors and hospitals on behalf of drug companies for the purpose of increasing individual doctors' prescriptions of specific drugs?

2. Is a pharmaceutical sales representative involved in duties and responsibilities that meet the requirements of a person employed in an administrative capacity under applicable California law?

The 9th Circuit will accept the California Supreme Court's decisions on these questions.

The California Supreme Court's review of these questions and the 3rd Circuit's review of the issues in Kuzinksi should provide employers with a better understanding of the application of exemptions for pharmaceutical sales representatives. The rulings should provide invaluable guidance to employers in the industry about how to classify these workers going forward and a clearer understanding to parties already litigating this issue.

Should the rulings suggest that pharmaceutical sales representatives normally are exempt from overtime, litigation of these claims may end. Otherwise, a new wave of class actions should be expected.