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Drug Sales Reps Entitled to California Overtime

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La Jolla, CAThe recent overtime class-action lawsuit against Merck (December 10, 2010) will likely have the same outcome as the Novartis settlement: Drug sales reps are entitled to California overtime compensation.

The Novartis Wage and Hour litigation may have opened the floodgates for overtime suits—not only this Merck complaint. Many California workers, such as "Pharmaceutical Sales Representatives" and "Customer Representatives," are misclassified as exempt…

An appeal was recently filed on the SmithKline Beecham (also known as GlaxoSmithKline or GSK) overtime lawsuit in the Ninth Circuit, arguing that the drug salespersons were improperly denied overtime pay. Even the Obama Administration's Secretary of Labor filed a brief in support of the sales reps (The Secretary administers and enforces the Fair Labor Standards Act (FLSA) and has a strong interest in ensuring that it is interpreted correctly in order to ensure that all employees receive the wages to which they are entitled).

Under California overtime laws, even if employees are paid a salary, they are entitled to be paid one and a half times the regular rate of pay for all hours worked in excess of eight hours in a workday. As well, under both state overtime laws and the FLSA, employees are entitled to overtime compensation for working more than forty hours in a work week, unless the employees are specifically exempted from the overtime provisions based on their job duties.

The drug sales reps and California overtime issue is about whether the drug sales reps meet the requirements of the outside salesperson exemption from overtime pay. Outside salespersons are exempt from overtime pay only if they spend more than 50 percent of their working time away from the employer's principal place of business or away from their home office "making sales." The Merck complaint claims that the sales reps were not "making sales," because at most, they could obtain non-binding promises from physicians to prescribe certain drugs as appropriate.

Pharmaceutical sales reps (the plaintiffs) in the Merck case allege that they are nonexempt and therefore entitled to overtime wages because they do not meet the tests of the sales exemption. Instead, they are promoting prescription drugs rather than actually making sales. It isn't even possible for them to sell prescription drugs, the sales reps say, because at the most, physicians can only agree to prescribe the drugs to clients as appropriate.

The Novartis sales reps argued that their primary responsibility is to visit physicians' offices, drop off drug samples and deliver scripted messages about the company's products. But Novartis argued that their employees are outside salespersons and therefore exempt from overtime pay under federal and state law. The US Court of Appeals for the Second Circuit didn't share the drug company's opinion: It ruled that pharma reps are not actually salespeople; furthermore, they are not exempt administrative employees "because the reps were tightly controlled and therefore could not exercise either discretion or independent judgment in the performance of their primary duties," both of which are preconditions to applying the administrative exemption.

According to Jeremy Heisler, an attorney for the Novartis sales reps, the Novartis result is especially important "because it is the first federal appellate decision finding that the outside sales and administrative exemptions don't cover pharmaceutical sales reps." In other words, a person who only promotes a product that will be sold by another person does not make a sale and is therefore entitled to overtime compensation.

Novartis's lawyers argued that the reps had "four freedoms" which allowed them to sufficiently exercise either discretion or independent judgment as required by the administrative exemption. They were free to decide:

- the sequence in which to visit doctors' offices
- how best to gain access to those offices
- how to allocate their Novartis budgets for promotional events, such as dinners
- how to allocate their samples.

But the court didn't see it that way. They determined that, because the reps play no role in: planning Novartis's marketing strategy; or formulating the "pre-scripted core messages" they must deliver to physicians; and are required to: (a) visit a given physician a certain number of times per trimester; (b) promote a given drug a certain number of times per semester; and (c) hold a designated number of promotional events ordered by Novartis, the "four freedoms" did not show the reps as exempt.

Perhaps the drug sales reps (or will they be called drug promotional reps?) overtime settlements will pave the way for overtime suits in other industries….

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