By Thomas Kaufman (follow me on Twitter)
This week, the Seventh Circuit issued a decision in Schaffer-Larose v. Eli Lily & Company, in which it held that pharmaceutical reps are exempt under the FLSA’s administrative exemption. This is separate from the issue pending before the United States Supreme Court in Christopher v. SmithKline Beecham of whether these types of employees are exempt under the outside sales exemption. This decision is contrary to the Second Circuit’s 2010 Novartis decision and could, in theory, create a separate Supreme Court decision to address the discrete exemption issue.
As discussed below, the most notable aspects of the opinion are that it (1) takes a narrow view of the (non-exempt) production side of the "administrative/production" dichotomy, (2) rejects the interpretation that the DOL advanced in amicus briefing in the Novartis case, implicitly finding the DOL brief was entitled to minimal deference, and (3) gives a broad interpretation of what qualifies as "discretion and independent judgment" for purposes of the exemption.
Before analyzing the case, for those who have not read any of the pharmaceutical rep cases, some background facts are necessary. Pharmaceutical reps are non-physicians who receive sales training and training on the pharmaceutical products their employers produce. They visit doctors within a geographic territory and try to persuade the doctors to prescribe their employer’s medication to patients who could benefit from the drugs.
While there are extensive regulatory limits on what they can say, they are free to decide how much time they’ll spend with each doctor, how they will approach doctor’s to demonstrate the benefits of a particular drug, and how to respond to any questions and concerns the doctor may have. They also are a conduit back to the employer of complaints the doctors raise about the drugs.
They get paid a base salary plus incentive pay based on the volume of the prescription drug sales within their geographic territory. Most of the litigation in this area has focused on whether their duties qualify as "sales" work for the outside sales exemption. If it doesn’t, then the alternative argument is that they engage in "promotion" or "marketing" work that qualifies for the administrative exemption.
With that in mind, here are three interesting takeaways from the case.
(1) Whether the work qualified as administrative rather than production work.
The Seventh Circuit began by looking to the language of the governing regulations (consistent with what the California Supreme Court said should be the proper analysis in Harris v. Superior Court). It quoted from the regulations the language that underpins the "administrative/production dichotomy":
"To meet [the requirement of performing work directly related to management or business operations], an employee must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example, from working on a manufacturing production line or selling a product in a retail or service establishment."
The court interpreted this standard as holding that an employee is not administrative if he is "engaged in the core function of a business," which in the case of pharmaceuticals is the "development and production of pharmaceutical products." The plaintiffs did not develop or produce pharmaceuticals, but instead performed work that "supports that function, but is distinct from it." (p. 32; emphasis added). By contrast, in Martin v. Cooper Electric (the 3rd Circuit case plaintiffs always cite for a broad view of "production work"), a salesman for an electrical wholesaler was a production worker because the entire business of the employer was wholesale sales, and the employee engaged primarily in that sales function. Sales there could not be construed as "supporting but distinct from" the core business of the employer.
The Seventh Circuit bolstered its conclusion by reference to the preamble of the 2004 update to the FLSA regulations, which noted that administrative work includes "representing the company" and "promoting sales," two tasks that fairly describe the pharmaceutical rep’s function within Eli Lilly. The court also noted that the regulations themselves, 29 C.F.R. 541.201(b), state that employees in "advertising, marketing and public relations" typically qualify as administrative, which again is a fair analog to a pharmaceutical rep’s role within the company. (p. 33).
Finally, the Seventh Circuit rejected the argument that the exemption was unavailable merely because the reps’ work was directed at a "limited, select group of physicians" as opposed to "promotional and marketing of the company overall," finding that limitation not to be supported by the governing regulations. (p. 31)
(2) Whether the DOL amicus brief was entitled to any deference.
In what has to be one of the most disingenuous footnotes ever, at footnote 20, the Seventh Circuit summarily dismisses the DOL’s amicus brief that had argued that pharmaceutical reps do not qualify for the administrative exemption. The court explained in footnote 20, that the DOL was not entitled to deference because nothing about the administrative exemption regulations is ambiguous:
"The parties address extensively the degree of deference owed to the Secretary’s position. Most of this argument addresses the appropriate deference owed to the Secretary’s interpretation of an ambiguous regulation. Cf. Christensen v. Harris Cnty., 529 U.S. 576, 588 (2000) (declining to defer to an agency’s interpretation, contained in an opinion letter, of an unambiguous regulation); Auer v. Robbins, 519 U.S. 452, 461-62 (1997) (deferring to an agency’s interpretation of its own regulation stated in an amicus brief). Although this question might deserve significant attention if an interpretation of the regulations were in question, as it perhaps is with respect to the outside sales exemption, it does not apply here. In this case, we are simply tasked with the application of an unambiguous regulation to the particular facts." (p. 28)
I have been litigating the administrative exemption for more than a decade now, and I cannot think of an area of wage and hour law that is more fraught with ambiguity, conflicting opinions, and unsettled standards. Nonetheless, I think it is the right call not to defer to the DOL when, due to political considerations, it weighs in on a particular case rather than issue regulations pursuant to the normal administrative processes.
(3) Whether the reps exercised sufficient discretion and independent judgment.
The Seventh Circuit held that the discretion the pharmaceutical reps had in how they communicated with doctors and responded to their inquiries was enough to qualify as "discretion and independent judgment on matters of significance." As the court explained it, the reps "are sent into physicians’ offices with minimal supervision to engage in conversation with the prescribing physicians who, as a practical matter, are in the most direct position to determine whether their companies’ products have a viable market" and "[i]n speaking to individual physicians, the representatives must tailor their messages to respond to the circumstances, whether those be the time or attention constraints from the physician or the concerns and objections that are voiced during a particular or previous visit." (pp. 48-49).
The court noted that this function was similar to certain descriptions of exercising discretion and judgment from the preamble to the 2004 regulations, including the reference to employees who are "free from direct supervision" and "use personalized communication techniques" with "responsibility for assessing customer needs" and a "duty to anticipate competitive products and distinguish them from competitor’s products." (p. 51).
Interestingly, the Seventh Circuit agreed that answering a doctor’s questions did involve some degree of "skill" but rejected the notion that a job "requiring skill" is necessarily inconsistent with it also entailing the exercise of discretion and independent judgment:
"The records clearly demonstrate that the representatives receive extensive skills training, particularly on sales techniques. They most certainly employ this skill, and, indeed, many others in the course of their daily duties. Nevertheless, applying these skills entails a great deal of judgment. The job requires far more than “applying well-established techniques, procedures or specific standards described in manuals.” (p. 53).
Overall, this case has a lot an employer can use in arguing that other types of jobs are exempt under the administrative exemption. For the practitioners reading this blog post, I encourage you to read it and try to work it into your defense.