News + Events
One Federal Court Isn’t Buying What Pharmaceutical Companies Are “Selling” – Drug Company Loses Argument That Its Sales Representatives Are Exempt From Overtime
February 9, 2009
Tevis Marshall
D. Eugene "Gene" Webb, Jr.
The Fair Labor Standards Act (FLSA) requires that employees receive overtime compensation for any hours worked in excess of 40 hours per week. One exception to this requirement applies to employees engaged in outside sales. For more than 50 years, employers have not had to pay overtime to employees who are customarily and regularly engaged away from the employer’s place of business and whose primary duty is making sales or obtaining orders or contracts for services. But what do you do when a court determines that your "sales" force is not actually "selling" anything?
In September, a United States District Court in Connecticut determined that a group of pharmaceutical sales representatives did not fall within the outside sales exemption under the FLSA and, thus, were entitled to overtime pay because they were not actually selling anything. And, yes, if the idea that "sales representatives" do not actually sell anything sounds a little odd to you at first, you’re not alone.
Over the last 2 years, at least three decisions issued by California federal courts have addressed precisely the same argument in the context of the California Labor Code (which is modeled after the FLSA). The sales representatives in those cases argued that because they merely influenced physicians to prescribe products to patients who were the ultimate buyers of the drugs, they did not engage in traditional sales and did not fall within the exemption. However, in all three cases, the California courts rejected this argument, concluding that the sales representatives were "selling" their respective products and were, therefore, not entitled to overtime. In response to the plaintiffs’ argument that physicians were not the ultimate purchasers of the products, one court called this "a distinction without a difference" and further recognized that "though it is true physicians never actually buy . . . prescription products, it is clearly they who control the product’s ultimate purchase" because they write prescriptions for patients. Thus, despite numerous unsuccessful lawsuits, all seemed well for the pharmaceutical companies . . . until September.
In the Connecticut decision, the plaintiff sales representatives successfully argued that their visits with physicians did not result in physicians entering into contracts to write a particular number of prescriptions, nor did the sales representatives sell their products directly to the physicians or the patients. Indeed, it would be unlawful for pharmaceutical representatives to dispense their product without a physician’s prescription. As the court further recognized, the physicians themselves did not have the capacity to purchase or place an order for pharmaceutical products because federal regulations prohibit physicians from writing prescriptions for any prescription-only drugs for themselves, for later non-prescription distribution to their patients.
If pharmaceutical sales representatives are not actually "selling" anything and the physicians upon whom they call are restricted from "buying" their products, who are the real buyers and sellers in a transaction involving the sale of a prescription drug? Well, the sales representatives in the Connecticut case convinced the court that the sale actually takes place between non-sales representative personnel in the drug company’s employ – referred to here as the "Trade Relations Group" – and drug wholesalers. The court recognized that individuals within the Trade Relations Group negotiated terms and conditions of the sale of products to wholesalers; however, no pharmaceutical sales representatives ever worked or reported to the Trade Relations Group. Thus, the court concluded that when sales representatives made their daily visits to physicians they were, at best, merely engaged in promotional work, not selling. Although promotional work can sometimes be considered exempt work, the FLSA provides that "promotional work that is incidental to sales made, or to be made, by someone else (e.g., the Trade Relations Group in this case) is not exempt outside sales work."
So, what is the fate of drug companies with legions of sales representatives racking up overtime? Although the defendant company in the Connecticut decision filed a motion to appeal the court’s decision prior to the trial, its motion was denied in November. However, given the wide-ranging impact that this decision could have on all pharmaceutical companies, a subsequent attempt to appeal the court’s decision is likely on the horizon.
According to industry sources, there are currently more than 100,000 pharmaceutical sales representatives working in the United States. Assuming (somewhat conservatively) that each sales representative in a workforce of 100,000 earns $75,000 annually and works 4 hour of overtime each week, the result to pharmaceutical companies is an annual overtime bill of approximately $375,000,000 in overtime. This is real money and, unlike the past, a real threat based on the developing case law. Depending on the final outcome of the Connecticut case, and the inevitable lawsuits that will follow under identical theories, the argument that pharmaceutical sales representatives are exempt from overtime may be one tough sale to make in the future.