Outside Sales Exemption

This is an interesting case.  A class action that was denied certification, appealed to the Second Circuit, which reversed because the lower court did not properly interpret the job description on the key issue of duties qualifying for the employer to claim the protection of the Part 541 exemptions.  The employees were salesmen and installation technicians.  Now, they get another shot to prove they are worthy of class status. The case is entitled Sydney et al. v. Time Warner Entertainment-Advance/Newhouse Partnership and issued from the Court of Appeals for the Second Circuit.

plastic black toolbox with tools over white backgroundThe lower court had relied upon the outside sales exemption.  The panel, however, concluded that the jobs seemed much more inclined to be installation jobs, rather than selling jobs.  Therefore, it was too early and improper to grant summary judgment as there were issues of fact.  The Court stated that “we conclude that the district court erred in holding on summary judgment that plaintiffs’ primary duties were exempt sales, as opposed to nonexempt installations, and accordingly in its ultimate conclusion that the outside sales exemption applied.”

These workers, dubbed territory sales representatives, or TSRs, contacted apartment building owners in upstate New York.  Their role was to urge these owners to funnel their tenants to the Employer for their cable TV, internet and phone service needs.  They received a small salary and commissions.  The plaintiffs allege they spent some time making calls to get business but the majority of their time was supposedly spent doing the actual installations (which would obviously be non-exempt work).  They asserted that they worked 55-70 hours per week.

They sued but the lower court rejected their claims, relying on the outside sales exemption, finding that that “based on [the] undisputed facts, the court finds that plaintiff’s primary duty was making sales.”  The Second Circuit disagreed.  That Court noted that the men went to work in hard hats and safety glasses.  They also carried tool boxes full of different tools.  Also, there were other employees whose job was to focus on door-to-door sales.

The Takeaway

The issue on summary judgment was whether the facts, i.e., the job description, undisputedly showed that the men were outside salesmen.  If, however, the facts on the ground differ from the printed description, that job description will be worthless as a defense in proving the exemption.  In other words, if the workers spend the majority of the time at work performing nonexempt work, such as installations they are non-exempt.

Simple as that…

The Fair Labor Standards Act is eighty years old this month and commentators strongly suggest that the law needs updating in many areas.

 cupcake with sparkler against a blue background, illustrating birthday conceptMy colleague Tammy McCutchen stated that a complaint-driven mechanism defense should be engrafted into the FLSA. She stated that “I think employers should get the opportunity to avoid [some liability] by having in place a system of compliance and taking appropriate action based on investigations, just like they have under Title VII and the ADA and the ADEA.”

In this manner, an employee complaint or issue about wages (e.g. overtime) would/could get resolved quickly and cheaply. Ms. McCutchen (a former DOL official) opines that if such a system is in place, that should work to limit employer liability if the employee ultimately sues. Under her theory, with which I concur, the “penalty” for such an employee who did not avail himself of the internal reporting system would be that he/she would not receive liquidated damages.

Another item on the management side wish list is a heartfelt desire to make securing class certification a little more difficult. In a typical FLSA collective action, the Plaintiff(s) first seek so-called conditional certification, fairly easy to secure, and then, later on, the employer can move to de-certify the class.

It should be harder to get over that first hurdle. Nowadays, plaintiffs use a few certifications, sometimes which are identical, and courts seem satisfied with such a meager showing. When a class is conditionally certified, the stakes and legal fees/costs for an employer rise dramatically. This contingency forces many employers into settlements which they might not otherwise have undertaken.

It should be harder, as perhaps with some multi-part test or standard, rather than a few similar sounding certifications.

Another area of concern and one badly in need of updating is the exemption “question.” For example, the outside sales exemptions emanates from a time when most salesmen were door-to-door or were, literally, outside all/most of the time. Nowadays, many sales are made and sales work done from a computer and a telephone, inside the employer’s place of business. Yet, the regulations still require that the salesman be “customarily and regularly” performing outside sales work. That is but one example. In that regard, reasonable people can differ on how exemption law should be applied, but there certainly is a need for more clarity, no matter which side you are on.

The Takeaway

These all sound pretty reasonable and common sensical to me.

Or is it my perspective?

Now that the new DOL exemption rules have issued, commentators have had time to reflect on what these changes may mean for business.  A few days ago, a House of Representatives committee heard that the new rules will hinder the ability of businesses to offer flexibility and advancement to newly overtime-eligible workers.  To the contrary, the head of the DOL championed the new rules as a great victory for middle-class employees.

Copyright: sergo / 123RF Stock Photo
Copyright: sergo / 123RF Stock Photo

Under Chairman Rep. John Kline, R-Minn., the House Education and the Workforce Committee was looking at the potential effects of the rules.  A management side attorney told the committee that the changes could lead to a host of potentially negative impacts from converting employees to non-exempt status.  He opined that there would be reduced flexibility for workers, limited career advancement opportunities and weakened employee morale.  He warned that there would also be more (as if we need it) FLSA litigation.

The lawyer noted that “in the short period of time since the revisions were published, it has become clear that it will be incredibly difficult for many employers to implement.  Complicating the analysis is the fact that the Department’s revisions would require employers to revisit these issues every three years, deciding whether continued classification of an employee as exempt is worth the new threshold salary increase.”

Another witness, a VP for HR from a major university, warned committee members that the overtime changes will be “difficult to absorb without significantly impacting university services.”  She also stated that the University would be forced to reclassify employees whose jobs were well-suited for exempt status.

The committee Chairman himself warned that the rule “will do more harm than good” and will adversely impact, to a greater extent, lower-income workers and younger Americans.  The Chairman stated that “this rule will disrupt the lives of countless individuals and do nothing to remove the regulatory landmines that are harmful to workers and employers.  He added that “workplaces are more dynamic and innovative than they have ever been, and the needs of today’s workers are much different than for those who worked when the [FLSA] was written more than 75 years ago.”

The Takeaway

I am not sure that these doomsday predictions are entirely accurate.  Businesses will lose some flexibility, but they may gain some certainty and peace of mind.  For those employees whose duties are currently borderline in terms of exemption, the salary changes make it “easier” for employers to now make them non-exempt and hourly and not have to worry about lawsuits challenging their exempt status.

On January 24, 2012, the Southern District of New York preliminarily approved a settlement in In Re: Novartis Wage and Hour Litigation, which will pay pharmaceutical sales representatives (“Sales Reps”) $99 million.  The case was originally filed in 2006 and affects over 7,000 current and former Sales Reps.

As I discussed in an earlier entry, in July 2010, the Second Circuit determined that the “outside sales exemption” was not applicable to Novartis’ Sales Reps because they 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.  The Second Circuit’s decision created shock waves throughout the pharmaceutical industry as drug companies have historically treated Sales Reps as exempt employees.  Novartis appealed the Second Circuit’s decision, and in February 2011, the United States Supreme Court denied Novartis’ petition for review.

All is not lost, however, for pharmaceutical companies.  On February 14, 2011, the Ninth Circuit affirmed the District of Arizona’s ruling in Christopher, et al. v. SmithKline Beecham Corp., that held a proposed class of pharmaceutical sales representatives to be exempt from overtime pay pursuant to the “outside sales exemption.”  In November 2011, the Supreme Court agreed to review the case, and hopefully, will conclusively answer the question of whether pharmaceutical sales representatives are exempt employees.

In the meantime, drug companies should be wary about classifying sales representatives as exempt if they do not “sell” or make any “sales,” and should measure their actual duties against the requirements of the exemption.

In early January, I posted an entry regarding the exempt status of pharmaceutical sales representatives. In the past several months, there have been several significant developments with respect to this issue.

On February 14, 2011, the Ninth Circuit affirmed the District of Arizona’s ruling in Christopher, et al. v. SmithKline Beecham Corp., that a proposed class of pharmaceutical sales representatives (“Sales Reps”) were exempt from overtime pay pursuant to the “outside sales exemption.”

In affirming the District of Arizona’s decision, the Ninth Circuit acknowledged that the duties of Sales Reps are the “functional equivalent” of making an outside sale in that they “makes sales by obtaining commitments to prescribe…drugs from physicians. They are credited with those sales and compensated accordingly by means of incentive payments.” The plaintiffs have filed a petition for rehearing to overturn the decision.

The Ninth Circuit’s decision in Christopher is in direct contradiction to the Second Circuit’s stance on the applicability of the “outside sales exemption” to Sales Reps. Indeed, in cases against Novartis and Schering Corp., the Second Circuit determined that Sales Reps do not fall within the “outside sales exemption” because they do not “sell” or make any “sales.” Rather, the Second Circuit held that the Sales Reps are responsible for promoting and marketing drugs rather than actually selling them. On February 28, 2011, the United States Supreme Court denied the petition by Novartis and Schering Corp. to review the decision.

This issue will likely have to decided by the United States Supreme Court due to the split in authority among circuit courts. Moreover, the exempt status of Sales Reps will likely become further muddled as there are cases pending in the Seventh Circuit, Connecticut, Florida, and Ohio.

In the meantime, drug companies should be wary about classifying Sales Reps as exempt if they do not “sell” or make any “sales.”