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Pharmaceutical Sales Representatives Not Entitled to Overtime

In a case of first impression for the Seventh Circuit Court of Appeals, the Court ruled that pharmaceutical sales representatives from Eli Lilly & Co. and Abbott Laboratories were properly classified as exempt from the overtime requirements of the Fair Labor Standards Act (FLSA) under the administrative exemption.  In reaching its decision, the Seventh Circuit combined two cases, one from Illinois and one from Indiana, that had reached divergent conclusions regarding whether the pharmaceutical sales representatives from Lilly and Abbott Labs should have been paid overtime.  The plaintiffs in both cases argued that they had been improperly classified as exempt from the FLSA’s overtime requirements under both the administrative exemption and the outside salespersons exemption.

The Seventh Circuit based its ruling on the administrative exemption only, noting that the outside salesperson exemption issue is pending before the U.S. Supreme Court.  The Seventh Circuit relied on Department of Labor regulations and decisions from other Circuit Courts of Appeals to find the work performed by the pharmaceutical sales representatives is properly characterized as exempt under the administrative exemption.  In order to qualify for the administrative exemption, the employees’ primary duty must be the performance of work directly related to the general business operations of the pharmaceutical companies and involve the exercise of independent judgment with respect to matters of significance.

The Seventh Circuit concluded that the sales representatives’ work was directly related to the pharmaceutical companies’ general business operations because it assisted with the running or servicing of the companies’ core business—manufacturing prescription drugs—rather than the actual production of the drugs themselves.  The sales representatives, for example, were critical to informing physicians concerning the Company’s products and communicating objections raised by the physicians about the performance of a particular pharmaceutical product back to the Company. 

The Seventh Circuit concluded that the sales representatives’ work involved the exercise of independent judgment with respect to matters of significance because, despite the constraints placed on them by the regulatory environment in which they operate, the sales representatives were extensively and rigorously trained to strategically structure their physician calls and visits to maximize sales.  In addition, they had to be flexible and tailor their messages to the individual physicians they visited based on the time constraints of the physicians and other factors they discerned to be important to making a sale.

This case represents a big win for the region’s pharmaceutical industry, as a different decision by the Seventh Circuit could have resulted in millions of dollars in liability for past unpaid overtime for the pharmaceutical sales representatives.  The importance of this case will depend, in part, on the outcome of the case currently before the U.S. Supreme Court addressing the outside sales representative exemption.  If the Supreme Court rules that pharmaceutical sales representatives are exempt as outside sales representatives, there will, of course, be less emphasis on the administrative exemption.  In contrast, if the Court rejects the outside sales representative exemption, this holding may be extremely critical for employers who employ outside sales representatives in the pharmaceutical sales industry.   

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