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A Tough Pill Spill to Swallow – Drug Company Hit With Lawsuit Challenging Exempt Status of Pharmaceutical Sales Representatives

Posted in Exemptions

On December 21, 2010, a former employee of drug company, Daiichi Sankyo, Inc. filed a lawsuit alleging that Daiichi misclassified pharmaceutical sales representatives (“Sales Reps”) as exempt employees thereby improperly denying them overtime under the Fair Labor Standards Act (“FLSA”). The lawsuit, entitled Kaiser v. Daiichi Sankyo, Inc., was filed in the Southern District of Ohio and seeks to certify a class of allegedly thirteen (1300) sales representatives.

Historically, drug companies have treated Sales Reps as exempt based on the FLSA’s “outside sales exemption.” The “outside sales exemption” is applicable where:

• The employee’s primary duty is making sales, or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and
• The employee is customarily and regularly engaged away from the employer’s place or places of business.

Over the past several years, the exempt status of Sales Reps has been a hotly contested issue. Indeed, within the last year alone, the exempt status of Sales Reps has been challenged in the Second Circuit, the Ninth Circuit, Connecticut, Florida, and now Ohio.

In July 2010, for the first time, the circuit courts weighed in on this issue when the Second Circuit ruled, in two separate actions, that the “outside sales exemption” did not apply to Sales Reps.  In particular, the Second Circuit determined that the “outside sales exemption” was not applicable because the Sales Reps at issue did not “sell” or make any “sales.” Rather, the Sales Reps were responsible for promoting drugs to physicians, providing information, and arranging events, such as lunches and speaking engagements. Simply put, the Second Circuit found that the Sales Reps merely promoted or marketed the drugs rather than actually selling them.

The lesson here is that drug companies need to review the job responsibilities of Sales Reps as the general practice in the industry is to classify such employees as exempt even though they do not “sell” or make any “sales.” If it is determined that they are non-exempt, misclassification should be corrected as early as possible. Considering that the Food and Drug Administration specifically prohibits Sales Reps from selling pharmaceuticals, drug companies likely face an uphill battle in maintaining the exemption.