The Avoidable Consequences Doctrine
Some lawyers in my law firm attended a legal education program this week that included a corporate defense attorney arguing for a Faragher-Ellerth approach to the Federal overtime law. The argument is that employers should be able to avoid the consequences of violating the Fair Labor Standards Act if the employees did not report violations of the Act to the employer. The burden of knowing the overtime law and complying with it should be shifted to the employees.
Its understandable that corporations would want to try to lift the “Faragher-Ellerth defense” from sexual harassment law and apply it to overtime cases. The words “Faragher-Ellerth” have become a shorthand generic phrase that means employees must report violations of the law to the company before the company has any liability for violating the law. This means that we can expect that we will soon be hearing defense attorneys arguing the defense in our overtime negotiations.
The Legal Education Version of the Gong Show.
One of my pet peeves is that too many lawyers—and judges, I suspect—don’t actually read the law that they are citing. My first instinct when I heard the argument that Faragher-Ellerth applies to overtime cases was to laugh. If the lawyers who listened to the presentation had actually read the Supreme Court’s opinions in Faragher and Ellerth, they would have laughed the lawyer advocating for applying it to the Fair Labor Standards Act off the stage. They would have heard a large gong then seen a hook on the end of a long stick pull the speaker off the stage. My second instinct was to be concerned, because too many people fail to read what the law actually says.
What the Supreme Court Actually Said in Faragher and Ellerth.
Burlington Indus., Inc. v. Ellerth, 524 US 742 (1998), and Faragher v. City of Boca Raton, 524 US 775 (1998) were two different Title VII sexual harassment cases decided by the United States Supreme Court on the same day. In those cases, the Supreme Court wrestled with the idea of why a company should be responsible for the sexual harassment by the company’s supervisors of the company’s employees. Sexual harassment is not a part of any supervisor’s job duties or done in furtherance of the company’s business. Why should a company be responsible for the sexual activities of its supervisors? The Court applied agency law to Title VII sexual harassment cases to explain when and why a company can be held responsible for sexual harassment.
The Supreme Court held that whenever sexual harassment by a supervisor culminates in a tangible employment action—such as a loss of wages—the company will automatically be responsible for the sexual harassment.
Why the "Avoidable Consequences Doctrine" or "Faragher-Ellerth Defense" Can Not Apply to the Fair Labor Standards Act.
Paying employees their wages and complying with the Fair Labor Standards Act is the business of every company with employees. It cannot even be compared to the sexual motivations of supervisors.
The Court created affirmative defenses that apply only when sexual harassment does not involve tangible employment actions. The Supreme Court said that even though sexually harassing employees is not part of the job of supervisors, companies must anticipate that sexual harassment happens. Employers must take action to prevent harassment.
To establish the defense, the employer must prove first, that it took reasonable steps to ensure that supervisors do not sexually harass employees, and second, that the employee unreasonably failed to take advantage of the corrective and preventive opportunities provided by the company to prevent or correct the harm.
The reasoning of the Faragher and Ellerth decisions cannot form the basis for an employer defense to the Fair Labor Standards Act. The FLSA involves the loss of tangible job benefits and complying with the FLSA involves wages only. The Faragher-Ellerth decisions provide a defense for the company when supervisors are pursuing non-work related activities (like sexual harassment) when they do not affect tangible employment benefits.
Gong!
The author is an attorney at Barrett & Farahany, LLP, representing employees in Atlanta, Georgia.
Friday, August 27, 2010
Sunday, August 1, 2010
Class Action Waiver Clauses in Employment Contracts Are Illegal "Yellow Dog" Contracts.
Employees have little power to resist coerced arbitration agreements.
Courts should not enforce class action waiver clauses in employer-employee arbitration agreements because the clauses will wipe out long-standing and hard fought legal rights of employees. Most of the Federal employment laws allow for employees to join together in collective action lawsuits to advocate for terms and conditions of employment. If courts enforce the agreements, employers will be able to eliminate the ability of employees to act concertedly to challenge employers in court.
Many employers are using class action waivers in arbitration agreements that they make their employees sign to get or to keep their jobs. It seems a bit unfair to slip an arbitration agreement into an employment application or even to force employees to sign away their right to go to court. But the courts have enforced coerced arbitration agreements and point out that the Federal Arbitration Act favors the arbitration of disputes--as long as certain conditions are met, like the employer pays the costs of the arbitration and employees are not forced to give up their substantive legal rights. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991).
Class action waivers should not be in abritration agreements.
A problem that I see is that employers are pushing the line when they require employees to sign a document where the employees must agree not to be a part of a class action lawsuit against the employer. I fight class action waivers as an illegal "yellow dog" contract. Yellow dog contracts were originally used by employers to force their employees to agree not to join a union.
The Norris-LaGuardia Act and the National Labor Relations Act enacted by congress in the 1930's outlawed yellow dog contracts. Employees have the right to join together to advocate for their mutual aid in improving the terms and conditions of their employment. This includes the right to file and participate in a class action lawsuit against the employer and specifically includes the right to file and opt-in to a collective action under the Fair Labor Standards Act. Trinity Trucking & Materials Corp., 221 NLRB 364 (1975), Le Madri Restaurant, 331 NLRB 269 (2000), Novotel New York, 321 NLRB 624 (1996), United Parcel Service, Inc., 252 NLRB 1015, (1980).
Employment contracts that prevent employee concerted action are unlawful.
The Norris-LaGuardia Act says that Federal Courts do not have the jurisdiction to enforce yellow dog contracts.
The problem is that a Federal Court has already enforced an arbitration agreement that prohibited employees from participating in class actions--without even considering the Norris-LaGuardia Act. Carter v. Countrywide Credit Industries, Inc., 362 F.3d 294 (5th Cir. 2004). The Countrywide decision focused on the liberality of the Federal Arbitration Act, but did not discuss whether the court was enforcing a yellow dog contract--without the jurisdiction to do so.
My law firm is prosecuting a collective action lawsuit on behalf of current and former pharmaceutical reps who work for Nephron Pharmaceuticals who were denied overtime pay. Nephron forced most of its drug reps to sign arbitration agreements that contains a clause that says the reps cannot file or participate in class action lawsuits. Nephron has asked the Federal Court in Atlanta to order the case to arbitration. We have asked the court to strike the anti-class action clause from the agreement before sending the case to arbitration.
We advocate for the rights of all employees.
The issue is important to fight because it involves the balance of power between employers and employees. We can handle multiple individual arbitrations against Nephron and adequately protect the rights of all of our clients. The problem is the setback to employee rights. With the ability to eliminate collective actions, employers will have the incentive to not comply with the Fair Labor Standards Act. Fewer employees will be able to challenge the employers and employers will profit from violating the law--even when they lose in arbitration. Employers who do not comply with the law will gain an unfair advantage over companies who do comply with the law. In an era of a decline of organized labor, enforcement and preservation of employee legal rights is essential.
Courts should not enforce class action waiver clauses in employer-employee arbitration agreements because the clauses will wipe out long-standing and hard fought legal rights of employees. Most of the Federal employment laws allow for employees to join together in collective action lawsuits to advocate for terms and conditions of employment. If courts enforce the agreements, employers will be able to eliminate the ability of employees to act concertedly to challenge employers in court.
Many employers are using class action waivers in arbitration agreements that they make their employees sign to get or to keep their jobs. It seems a bit unfair to slip an arbitration agreement into an employment application or even to force employees to sign away their right to go to court. But the courts have enforced coerced arbitration agreements and point out that the Federal Arbitration Act favors the arbitration of disputes--as long as certain conditions are met, like the employer pays the costs of the arbitration and employees are not forced to give up their substantive legal rights. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991).
Class action waivers should not be in abritration agreements.
A problem that I see is that employers are pushing the line when they require employees to sign a document where the employees must agree not to be a part of a class action lawsuit against the employer. I fight class action waivers as an illegal "yellow dog" contract. Yellow dog contracts were originally used by employers to force their employees to agree not to join a union.
The Norris-LaGuardia Act and the National Labor Relations Act enacted by congress in the 1930's outlawed yellow dog contracts. Employees have the right to join together to advocate for their mutual aid in improving the terms and conditions of their employment. This includes the right to file and participate in a class action lawsuit against the employer and specifically includes the right to file and opt-in to a collective action under the Fair Labor Standards Act. Trinity Trucking & Materials Corp., 221 NLRB 364 (1975), Le Madri Restaurant, 331 NLRB 269 (2000), Novotel New York, 321 NLRB 624 (1996), United Parcel Service, Inc., 252 NLRB 1015, (1980).
Employment contracts that prevent employee concerted action are unlawful.
The Norris-LaGuardia Act says that Federal Courts do not have the jurisdiction to enforce yellow dog contracts.
The problem is that a Federal Court has already enforced an arbitration agreement that prohibited employees from participating in class actions--without even considering the Norris-LaGuardia Act. Carter v. Countrywide Credit Industries, Inc., 362 F.3d 294 (5th Cir. 2004). The Countrywide decision focused on the liberality of the Federal Arbitration Act, but did not discuss whether the court was enforcing a yellow dog contract--without the jurisdiction to do so.
My law firm is prosecuting a collective action lawsuit on behalf of current and former pharmaceutical reps who work for Nephron Pharmaceuticals who were denied overtime pay. Nephron forced most of its drug reps to sign arbitration agreements that contains a clause that says the reps cannot file or participate in class action lawsuits. Nephron has asked the Federal Court in Atlanta to order the case to arbitration. We have asked the court to strike the anti-class action clause from the agreement before sending the case to arbitration.
We advocate for the rights of all employees.
The issue is important to fight because it involves the balance of power between employers and employees. We can handle multiple individual arbitrations against Nephron and adequately protect the rights of all of our clients. The problem is the setback to employee rights. With the ability to eliminate collective actions, employers will have the incentive to not comply with the Fair Labor Standards Act. Fewer employees will be able to challenge the employers and employers will profit from violating the law--even when they lose in arbitration. Employers who do not comply with the law will gain an unfair advantage over companies who do comply with the law. In an era of a decline of organized labor, enforcement and preservation of employee legal rights is essential.
Monday, July 26, 2010
Overtime exemption for creative professionals
Q. Aren't television news employees, radio DJ's and TV and radio producers exempt as creative professionals?
A. Many people mistakenly believe that simply because an employee is paid a salary means that the employee is automatically exempt from the overtime pay requirements. This belief is not true. Whether an employee is exempt is determined by what the employee’s job duties are.
All of the "creative" workers that I have talked to have been automatically classified by their employers as exempt from the overtime requirements of the Fair Labor Standards Act. Times have changed in the television and radio business. Ever since the Janet Jackson "wardrobe malfunction" during the Super Bowl, the FCC has been cracking down on broadcasters. Broadcasters have in turn cracked down on their on air talent and severely restricted what they can say and do on the air. In addition, the stations are trying to do business with as few employees as possible and requiring their on air talent to do a lot of work off the air. Most of the people I talk to are working far in excess of 40 hours a week with no extra pay for the overtime hours.
A person who works as a creative professional is exempt from the overtime requirements. The United States Department of Labor defines a creative professional as an employee who’s “primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.” 29 CFR sec. 541.302(a). “To qualify for exemption as a creative professional, the work performed must be “in a recognized field of artistic or creative endeavor. This includes such fields as music, writing, acting and the graphic arts.” 29 CFR 541.302(b).
Frequently people employed by television stations and networks, radio stations and newspapers are automatically classified as exempt with the employer claiming an employee as exempt as a creative professional. The courts have been addressing the creative professional exemption since shortly after the passage of the FLSA in 1938.
The key question is what does it mean to “perform work requiring invention, imagination, originality or talent” in a recognized field of artistic or creative endeavor? The courts have routinely held that the answer is fact specific and each case must be decided on its own facts.
They key to determining whether invention, imagination, originality or talent are being exercised by the employee is whether the aim of the employee’s work is to recreate or communicate an experience of the artist.
The courts have been requested to decide whether various workers in the news industry are exempt as creative professionals. The news industry serves as a good example for various other occupations that deal with the creative professional exemption. In general, the courts have found that reporting the news does not involve invention, imagination or originality. It does not involve an expression of the experience of an artist. Reporting what happened is not creating what happened. Producers of news have also been found to be non-exempt for the same reasons. See Dalheim v. KDFW-TV, 918 F.2d 1220 (5th Cir. 1990). See
and Reich v. Newspapers of New Engl., 44 F.3d 1060 (1st Cir. 1995).
On the other hand, "top flight" columnists who write about what they want and express themselves in their columns have been found to be exempt. See Sherwood v. Washington Post, 871 F.Supp. 1471 (D.D.C. 1994).
A. Many people mistakenly believe that simply because an employee is paid a salary means that the employee is automatically exempt from the overtime pay requirements. This belief is not true. Whether an employee is exempt is determined by what the employee’s job duties are.
All of the "creative" workers that I have talked to have been automatically classified by their employers as exempt from the overtime requirements of the Fair Labor Standards Act. Times have changed in the television and radio business. Ever since the Janet Jackson "wardrobe malfunction" during the Super Bowl, the FCC has been cracking down on broadcasters. Broadcasters have in turn cracked down on their on air talent and severely restricted what they can say and do on the air. In addition, the stations are trying to do business with as few employees as possible and requiring their on air talent to do a lot of work off the air. Most of the people I talk to are working far in excess of 40 hours a week with no extra pay for the overtime hours.
A person who works as a creative professional is exempt from the overtime requirements. The United States Department of Labor defines a creative professional as an employee who’s “primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.” 29 CFR sec. 541.302(a). “To qualify for exemption as a creative professional, the work performed must be “in a recognized field of artistic or creative endeavor. This includes such fields as music, writing, acting and the graphic arts.” 29 CFR 541.302(b).
Frequently people employed by television stations and networks, radio stations and newspapers are automatically classified as exempt with the employer claiming an employee as exempt as a creative professional. The courts have been addressing the creative professional exemption since shortly after the passage of the FLSA in 1938.
The key question is what does it mean to “perform work requiring invention, imagination, originality or talent” in a recognized field of artistic or creative endeavor? The courts have routinely held that the answer is fact specific and each case must be decided on its own facts.
They key to determining whether invention, imagination, originality or talent are being exercised by the employee is whether the aim of the employee’s work is to recreate or communicate an experience of the artist.
The courts have been requested to decide whether various workers in the news industry are exempt as creative professionals. The news industry serves as a good example for various other occupations that deal with the creative professional exemption. In general, the courts have found that reporting the news does not involve invention, imagination or originality. It does not involve an expression of the experience of an artist. Reporting what happened is not creating what happened. Producers of news have also been found to be non-exempt for the same reasons. See Dalheim v. KDFW-TV, 918 F.2d 1220 (5th Cir. 1990). See
and Reich v. Newspapers of New Engl., 44 F.3d 1060 (1st Cir. 1995).
On the other hand, "top flight" columnists who write about what they want and express themselves in their columns have been found to be exempt. See Sherwood v. Washington Post, 871 F.Supp. 1471 (D.D.C. 1994).
Tuesday, July 20, 2010
Overtime Pay for Highly Compensated Employees?
Q. How can an employee who makes over $100,000 per year be entitled to overtime pay?
A. According to the United States Constitution, Congress is the branch of government that makes laws. The executive branch of government enforces laws. When Congress passed the Fair Labor Standards Act it exempted employees with certain job duties from the requirement to receive overtime.
Congress delegated to the secretary of labor—a part of the executive branch—the authority to define and delimit the what job duties make an employee a bona fide “executive”, “administrative”, “professional”, and “outside salesman”. Congress did not delegate to the secretary of labor the authority to create additional exemptions.
In 2004, the Bush Administration Department of Labor—in a gift to corporations—revised many of its regulations which define and delimit the definitions of the exemptions. One of the regulations that the secretary of labor added is referred to as “the highly compensated employee exemption.” 29 CFR 541.601. In the wording of the regulation, the secretary says, “[a] high level of compensation is a strong indicator of an employee's exempt status, thus eliminating the need for a detailed analysis of the employee's job duties.” (Emphasis added). Only the Congress can change the FLSA to create new exemptions to the law based on an employee’s level of compensation. I take the position that the “highly compensated employee exemption” is void because the Department of Labor did not have the authority to enact it in the first place.
As far as I know, the validity of the regulation has not yet been decided by the courts.
In addition, employers are required to pay overtime to some “highly compensated” employees because the terms of the regulation do not exempt the employees. The regulation says, “An employee with total annual compensation of at least $100,000 is deemed exempt under section 13(a)(1) of the Act if the employee customarily and regularly performs any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee identified in subparts B, C or D of this part.” If the employee does not perform any of the duties of an executive, administrative or professional employee, the regulation does not apply.
Many employees who make over $100,000 make that salary for exercising high degrees of skill and talent—not for administering or managing a business. Examples of highly paid employees who may not be exempt are pharmaceutical reps, mortgage bankers and other bank employees, radio DJ’s, television reporters and producers, graphic designers, product managers and other highly skilled valuable employees whose job duties do not include executive administrative or professional tasks—as those terms are defined and delimited by the secretary of labor.
A. According to the United States Constitution, Congress is the branch of government that makes laws. The executive branch of government enforces laws. When Congress passed the Fair Labor Standards Act it exempted employees with certain job duties from the requirement to receive overtime.
Congress delegated to the secretary of labor—a part of the executive branch—the authority to define and delimit the what job duties make an employee a bona fide “executive”, “administrative”, “professional”, and “outside salesman”. Congress did not delegate to the secretary of labor the authority to create additional exemptions.
In 2004, the Bush Administration Department of Labor—in a gift to corporations—revised many of its regulations which define and delimit the definitions of the exemptions. One of the regulations that the secretary of labor added is referred to as “the highly compensated employee exemption.” 29 CFR 541.601. In the wording of the regulation, the secretary says, “[a] high level of compensation is a strong indicator of an employee's exempt status, thus eliminating the need for a detailed analysis of the employee's job duties.” (Emphasis added). Only the Congress can change the FLSA to create new exemptions to the law based on an employee’s level of compensation. I take the position that the “highly compensated employee exemption” is void because the Department of Labor did not have the authority to enact it in the first place.
As far as I know, the validity of the regulation has not yet been decided by the courts.
In addition, employers are required to pay overtime to some “highly compensated” employees because the terms of the regulation do not exempt the employees. The regulation says, “An employee with total annual compensation of at least $100,000 is deemed exempt under section 13(a)(1) of the Act if the employee customarily and regularly performs any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee identified in subparts B, C or D of this part.” If the employee does not perform any of the duties of an executive, administrative or professional employee, the regulation does not apply.
Many employees who make over $100,000 make that salary for exercising high degrees of skill and talent—not for administering or managing a business. Examples of highly paid employees who may not be exempt are pharmaceutical reps, mortgage bankers and other bank employees, radio DJ’s, television reporters and producers, graphic designers, product managers and other highly skilled valuable employees whose job duties do not include executive administrative or professional tasks—as those terms are defined and delimited by the secretary of labor.
Thursday, July 15, 2010
Pharmaceutical sales reps entitled to overtime
Q. Are pharmaceutical reps required to receive overtime pay?
A. Yes. Under the Fair Labor Standards Act, a federal law that applies everywhere in the United States, the default rule is that all employees are entitled to receive overtime pay. When Congress created the FLSA in 1938—in the midst of the Great Depression—it intended to impose a minimum wage and to shorten the workweek with a maximum hours requirement. The maximum hours part of the law says that no employer shall employ an employee for more than 40 hours in a workweek—without paying time and a half the regular rate of pay for the hours worked over 40. The Congress also created exemptions to the maximum hour requirement for certain “white collar” employees. To claim an exemption, the employer must prove that the employee is clearly and unmistakably subject to an exemption.
Pharmaceutical companies hire representatives to educate doctors about the drugs they manufacture and to encourage the doctors to prescribe those drugs to their patients. The representatives receive commissions when the patients of the doctor fill a prescription for the drug at a pharmacy. Doctors do not buy anything from the pharmaceutical rep. The pharmaceutical companies usually develop an elaborate script for the reps to use in presenting to the doctor. They provide the reps with literature to leave with the doctors, they encourage the reps to leave samples of the drugs with the doctors and they provide the reps with alternative ways to present the drug to the doctor depending on what concerns or questions the doctors have about the drug. The drug company will usually assign a geographic territory to the rep and require the rep to visit a specific minimum number of doctors in a day or a week.
The pharmaceutical representatives who follow their employer’s system usually work long hours. Most of the drug companies have failed to pay the overtime required by the FLSA to their representatives even though they usually work more than 40 hours in a workweek. Remember, the employer has the burden to prove that an employee is subject to an exemption from the requirement to pay overtime. If the employer cannot establish an exemption, the employee must be compensated according to the law.
Why do the drug companies fail to pay overtime to pharmaceutical reps? The drug companies usually have two answers. First, they say the reps are engaged in “outside sales” which is an exemption from the overtime law. Second, they say that the reps are administrators of the business, which is another exemption.
But the Fair Labor Standards Act defines “sales” as “obtaining orders.” The reps do not obtain orders from doctors. In the United States, it’s illegal to sell certain drugs except through a pharmacy with a doctor’s prescription. The reps may be educating and encouraging the doctors to prescribe medications, but they are not “obtaining orders” from the doctors. Most courts that have considered this issue have found that where there is an intervening person between the employee and the person who decides to buy, the outside sales exemption does not apply. The pharmaceutical company cannot rely on the outside sales exemption to refuse overtime pay to its pharmaceutical representatives.
The drug companies then fall back to the “administrative” exemption to deny overtime pay to their reps. The administrative exemption is one of the most complicated exemptions to understand. Generally, if you consider that a business is composed of people who work “in the business” and other people who work “on the business,” the people who work on the business are administrative. Administrative workers do things that exist in all businesses, like accounting, marketing, human resources, management and other things like that. To be an exempt administrative worker, the employee must have the authority to make independent decisions “on matters of significance.” The drug companies have taken the position in litigation that their pharmaceutical representatives are engaged in “marketing” and that they have the authority to exercise independent discretion and judgment on matters of significance to the business because they can decide who they will present the products to, how they will present the products and when they will present the products. That’s marketing, they argue, and the reps are making all the significant decisions on how to market the company’s drugs.
The administrative argument sounds like it could be a plausible way for the drug companies to get around the overtime law. The problem with the argument is that the companies usually can’t prove that they are “clearly and unmistakably” entitled to the exemption. Company personnel documents usually show that the reps have a manager who occasionally rides along with them and critiques their performance, stresses how many appointments they need to make, what doctors and hospitals to focus on and how many samples they must give out, etc. Company documents also show that many of the drug companies who sometimes stand to make billions of dollars a year on a drug they spent billions of dollars to develop and bring to market, do not actually leave the significant decisions on how to market the products to the individual pharmaceutical representatives. The representatives may use independent discretion and judgment on many things, but they usually do not have the authority to make significant decisions on how to market the companies’ products.
Recently, the Second Circuit Court of Appeals—the first circuit to consider the problem of pharmaceutical representatives—found that the employer had not met its burden to prove that it was entitled to claim that reps were exempt from the overtime law. See In re Novartis Wage and Hour Litigation, No. 09-0437-cv (July 6, 2010). http://case.lawmemo.com/2/novartis.pdf The court noted that the reps were paid an average of $91,000 in 2005 (many earned well over $100,000) and that they used a significant amount of skill in their jobs to execute the company’s system. But the skill and compensation to the reps for exercising high skills were not excuses allowing for the company to avoid the overtime law.
Don’t expect the pharmaceutical companies to start paying overtime to its reps any time soon or for them to stop fighting the cases that are still pending. But the facts of most of the cases are against the companies and they will have a hard time proving they are entitled to take an exemption.
A. Yes. Under the Fair Labor Standards Act, a federal law that applies everywhere in the United States, the default rule is that all employees are entitled to receive overtime pay. When Congress created the FLSA in 1938—in the midst of the Great Depression—it intended to impose a minimum wage and to shorten the workweek with a maximum hours requirement. The maximum hours part of the law says that no employer shall employ an employee for more than 40 hours in a workweek—without paying time and a half the regular rate of pay for the hours worked over 40. The Congress also created exemptions to the maximum hour requirement for certain “white collar” employees. To claim an exemption, the employer must prove that the employee is clearly and unmistakably subject to an exemption.
Pharmaceutical companies hire representatives to educate doctors about the drugs they manufacture and to encourage the doctors to prescribe those drugs to their patients. The representatives receive commissions when the patients of the doctor fill a prescription for the drug at a pharmacy. Doctors do not buy anything from the pharmaceutical rep. The pharmaceutical companies usually develop an elaborate script for the reps to use in presenting to the doctor. They provide the reps with literature to leave with the doctors, they encourage the reps to leave samples of the drugs with the doctors and they provide the reps with alternative ways to present the drug to the doctor depending on what concerns or questions the doctors have about the drug. The drug company will usually assign a geographic territory to the rep and require the rep to visit a specific minimum number of doctors in a day or a week.
The pharmaceutical representatives who follow their employer’s system usually work long hours. Most of the drug companies have failed to pay the overtime required by the FLSA to their representatives even though they usually work more than 40 hours in a workweek. Remember, the employer has the burden to prove that an employee is subject to an exemption from the requirement to pay overtime. If the employer cannot establish an exemption, the employee must be compensated according to the law.
Why do the drug companies fail to pay overtime to pharmaceutical reps? The drug companies usually have two answers. First, they say the reps are engaged in “outside sales” which is an exemption from the overtime law. Second, they say that the reps are administrators of the business, which is another exemption.
But the Fair Labor Standards Act defines “sales” as “obtaining orders.” The reps do not obtain orders from doctors. In the United States, it’s illegal to sell certain drugs except through a pharmacy with a doctor’s prescription. The reps may be educating and encouraging the doctors to prescribe medications, but they are not “obtaining orders” from the doctors. Most courts that have considered this issue have found that where there is an intervening person between the employee and the person who decides to buy, the outside sales exemption does not apply. The pharmaceutical company cannot rely on the outside sales exemption to refuse overtime pay to its pharmaceutical representatives.
The drug companies then fall back to the “administrative” exemption to deny overtime pay to their reps. The administrative exemption is one of the most complicated exemptions to understand. Generally, if you consider that a business is composed of people who work “in the business” and other people who work “on the business,” the people who work on the business are administrative. Administrative workers do things that exist in all businesses, like accounting, marketing, human resources, management and other things like that. To be an exempt administrative worker, the employee must have the authority to make independent decisions “on matters of significance.” The drug companies have taken the position in litigation that their pharmaceutical representatives are engaged in “marketing” and that they have the authority to exercise independent discretion and judgment on matters of significance to the business because they can decide who they will present the products to, how they will present the products and when they will present the products. That’s marketing, they argue, and the reps are making all the significant decisions on how to market the company’s drugs.
The administrative argument sounds like it could be a plausible way for the drug companies to get around the overtime law. The problem with the argument is that the companies usually can’t prove that they are “clearly and unmistakably” entitled to the exemption. Company personnel documents usually show that the reps have a manager who occasionally rides along with them and critiques their performance, stresses how many appointments they need to make, what doctors and hospitals to focus on and how many samples they must give out, etc. Company documents also show that many of the drug companies who sometimes stand to make billions of dollars a year on a drug they spent billions of dollars to develop and bring to market, do not actually leave the significant decisions on how to market the products to the individual pharmaceutical representatives. The representatives may use independent discretion and judgment on many things, but they usually do not have the authority to make significant decisions on how to market the companies’ products.
Recently, the Second Circuit Court of Appeals—the first circuit to consider the problem of pharmaceutical representatives—found that the employer had not met its burden to prove that it was entitled to claim that reps were exempt from the overtime law. See In re Novartis Wage and Hour Litigation, No. 09-0437-cv (July 6, 2010). http://case.lawmemo.com/2/novartis.pdf The court noted that the reps were paid an average of $91,000 in 2005 (many earned well over $100,000) and that they used a significant amount of skill in their jobs to execute the company’s system. But the skill and compensation to the reps for exercising high skills were not excuses allowing for the company to avoid the overtime law.
Don’t expect the pharmaceutical companies to start paying overtime to its reps any time soon or for them to stop fighting the cases that are still pending. But the facts of most of the cases are against the companies and they will have a hard time proving they are entitled to take an exemption.
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