Applying a broad interpretation to the Administrative exemption under the Fair Labor Standards Act (“FLSA”), 29 U.S.C. § 213(a)(1), the United States Court of Appeals for the Seventh Circuit held, Tuesday, that pharmaceutical sales representatives (“PSRs”) are exempt from overtime.  In Schaefer-LaRose v. Eli Lilly & Co., Nos. 10-39855, 11-1980, 11-2131, 2012 U.S. App. LEXIS 9300 (7th Cir. May 8, 2012), the Court resolved an intra-circuit split as to the exempt status of PSRs.  The Court expressly declined to address the applicability of the Outside Sales exemption, having found that PSRs fall within the Administrative exemption, and noting that the Supreme Court is expected to rule shortly on this precise issue in Christopher v. SmithKline Beecham Corp., 635 F.3d 383 (9th Cir. 2011), cert. granted, 132 S.Ct. 760 (Nov. 28, 2011).  In so ruling, the Seventh Circuit joined the Third Circuit (Smith v. Johnson & Johnson, 593 F.3d 280 (3rd Cir. 2010)) in finding PSRs Administratively exempt.

In order to fall within the FLSA’s Administrative exemption, an employer must establish that the employee has a primary duty of performing office or non-manual work directly related to management or general business operations and whose responsibilities include the exercise of discretion and independent judgment with respect to matters of significance.  The Seventh Circuit found that PSRs performed non-manual work, running or servicing the employer’s business operation, as they represented their employers to physicians who were the most important decision-makers regarding use of their respective companies’ products.  Hence, the PSRs satisfied the Administrative exemption’s first substantive criterion, having a principal duty of management, because they were the public “face” of their employers, promoting and marketing to prescribing physicians.

Turning to other final substantive criterion for satisfying the Administrative exemption, the Court found that the PSRs exercised discretion and independent judgment because they tailored their core message to the specific physician’s interests, time constraints, and specific concerns.  Equally important, the Seventh Circuit found that PSRs were unsupervised on these sales calls, and applied strategic analysis to their work, choosing which physicians to visit and the frequency of such visits.  There was no dispute that PSRs were paid on a salary basis.  As such, the Seventh Circuit rejected the view of the Second Circuit that the discretion exercised was severely limited by the employer and was too insignificant to fall within the Administrative exemption.  See, In re Novartis Wage & Hour Litigation, 611 F.3d 141 (2d Cir. 2010).

The primary task of PSRs, such as the plaintiffs in Schaefer, was to personally call upon physicians and persuade them to prescribe their employers’ pharmaceutical products.  Federal law and medical ethics requirements prohibit PSRs from actually selling pharmaceuticals to physicians, and the physicians whom they call upon do not buy directly from PSRs.  Rather, the objective of the PSRs is to “increase the number of prescriptions that those physicians write for their employer’s products.”  Shaefer at *6.  The unique aspects of the PSRs as “sales” representatives who make no direct sales, and who cannot deviate significantly from company-prepared messages and materials has made the exemption status of PSRs a frequently-litigated issue.

In reaching its conclusion that PSRs satisfied the Administrative exemption, the Schaefer Court applied an expansive interpretation to the requirement that the employee’s role be “directly related to the management or general business operations of the employer.” 29 C.F.R. § 541.200(a)(2).  The Court emphasized that the companies’ core function is the production of pharmaceuticals, and therefore, because the PSRs “neither produce the employers’ products nor generate specific sales,” their role is best characterized as “servicing” both those aspects of the business.  Schaefer at 50.  Noting that the regulations list “advertising,” “marketing,” and “public relations” as illustrative examples of “functional areas” from which employees frequently qualify for the Administrative exemption—though acknowledging that none of those is a “perfect description of the work performed by the PSRS, id. at 43—the Court focused on the representative role played by the PSRs in these cases as “the public face of their employer to the most important decision-maker regarding use of their companies’ products, the prescribing physicians.” Id. at 50.  The Court essentially found that an employee who regularly represents the company to third parties, such as potential buyers or vendors, is “servicing” the business.

In reaching this conclusion, the Court relied on the First Circuit’s decision in Reich v. John Alden Life Insurance Co., 126 F.3d 1 (1st Cir. 1997), where the Court held that insurance marketing representatives were engaged in “activit[ies] ancillary to” the employer’s principal function because their role was to “represent the company” and “promote sales,” two examples of exempt Administrative work.  The Schaefer Court noted that other Seventh Circuit decisions had similarly focused on the employee’s role as company representative to third parties in finding the “management” prong of the Administrative exemption satisfied.

Turning to the “discretion and independent judgment” criterion of the Administrative exemption, the Court found that PSRs are not “mouthpieces, reciting scripts” because they can “tailor their messages” as needed.  Id. at 63-64.  Emphasizing that PSRs are given extensive substantive training, the Court noted that the companies desired the PSRs to not only convey the message, but also understand it, thereby demonstrating that the companies anticipated the need for the PSRs to formulate independent responses to varied situations.  Id. at 63.

While the Court conceded that many factors listed in the regulations for determining discretion and independent judgment were absent in these cases, it turned, interestingly, to the comments of the U.S. Department of Labor in the Preamble to the regulations.  There, it found, the USDOL had conceded that an employee’s freedom from direct supervision, problem-solving on behalf of management, use of personalized communication techniques, and responsibility for assessing customer needs were each criteria found relevant by courts in assessing whether discretion and independent judgment were exercised within the meaning of the Administrative exemption.  Id. at 51.  Such responsibilities, indeed, were exercised by the PSRs here, persuading the Seventh Circuit that this prong of the Administrative exemption was satisfied.

While the application of the FLSA’s Outside Sales exemption to PSRs awaits the Supreme Court’s decision  in Christopher, Schaefer has the potential to be a very far-reaching decision because of the Seventh Circuit’s expansive reading of the Administrative exemption.