The Ninth Circuit U.S. Court of Appeals (Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington) has added another chapter in the saga of whether pharmaceutical sales representatives (PSRs) qualify for the federal Fair Labor Standards Act's "outside salesman" exemption.  The court recently ruled in Christopher v. SmithKline Beecham Corp. d/b/a GlaxoSmithKline that the Glaxo PSRs did fall within the exemption.  The decision creates a split in the federal appellate courts by finding that the exemption applied to PSRs performing duties essentially the same as those found to be non-exempt by the Second Circuit in the Novartis case about which we previously reported.

Significantly, the Ninth Circuit also rejected arguments presented in a friend-of-the-court brief filed by the U.S. Labor Department.  The court said that the brief was not entitled to controlling deference, contrary to the position taken by the Second Circuit.

PSRs Were Selling

Adopting a common-sense approach to the exemption, the Ninth Circuit said that a "sale" in the pharmaceutical industry's context occurs with "the exchange of non-binding commitments" between a PSR and a physician by which "the manufacturer will provide an effective product [that] the doctor will appropriately prescribe."  "[F]or all practical purposes, this is a sale," the court said, noting that the "primary duty" of PSRs "is not promoting Glaxo's products in general or schooling physicians in drug development," but "causing a particular doctor to commit to prescribing more of the particular drugs in the PSR's drug bag," thus increasing company sales.

The Ninth Circuit rejected the PSRs' argument that they did not transfer any medications to physicians, such that they merely promoted Glaxo's products.  Instead, the court agreed with Glaxo that the phrase "other disposition" in the FLSA's definition of "sale" or "sell" is a "broad catch-all category" by which an employee is a salesperson if he or she "in some sense make[s] a sale."

No Deference to DOL's Brief

In another significant aspect of the ruling, the Ninth Circuit refused to give "controlling deference" to a brief filed by the U.S. Secretary of Labor supporting the PSRs' position.  First, the court criticized DOL's "outside salesman" exemption regulations, noting that, "instead of using its expertise and experience to formulate a regulation, [DOL] has elected merely to paraphrase the statutory language."  The court said that DOL's regulations contained mere "parroting" of the FLSA's definition of the term "sale." The court said, "This clarifies nothing about the meaning of [the FLSA's definition of "sale" or "sell"]; it merely incorporates the very undefined, very un-delimited term" in the statute. 

Under those circumstances, the court concluded, deference to DOL's brief was not warranted:  "Rather than applying the regulation to the facts presented, the Secretary has used her appearance .  .  . to draft a new interpretation of the FLSA's language."  The court determined that it would be an undue expansion of deference to DOL "to accept the Secretary's offer, and give controlling deference even where there exists no meaningful regulatory language to interpret .  .  .."

The issues created by this split in the circuits might well have to be resolved by the U.S. Supreme Court.

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The parameters of and processes associated with the DOL/ABA Bridge to Justice initiative remain neither transparent nor open, at least where employers are concerned.  We have attempted to delve into these matters since posting our November and December comments.

On December 28, we submitted a request to the U.S. Wage and Hour Division under the federal Freedom of Information Act for "copies of all standard letters, memoranda, notices, instructions, statements, forms, summaries, descriptions, booklets, and all other documents and written materials that the U.S. Labor Department and/or any of its subordinate agencies are using or intend to use to communicate with complaining individuals and/or to attorneys representing them in connection with matters arising under or relating to the 'Bridge to Justice' initiative recently undertaken in conjunction with the American Bar Association."  We also asked for "copies of all standard letters, memoranda, notices, instructions, statements, forms, summaries, descriptions, booklets, and all other documents and written materials that the U.S. Labor Department and/or any of its subordinate agencies are using or intend to use to communicate internally about matters arising under or relating to the aforementioned 'Bridge to Justice' initiative."

The 20-business-day deadline for a response from the Division has expired.  We have received no documents, nor has our request been acknowledged.  We sent a status inquiry on February 4.

We hope that, when we finally receive responsive materials, they will shed some light upon the many still-unaddressed questions that the Initiative provokes.  Among them are these:

♦   Will the Labor Department notify employers that it has received a request to release information from an investigative file under the Initiative?  Under what circumstances and how far in advance of any release will this notification be given?  What will be the nature and substance of this notification?  Will the employer have a meaningful opportunity to oppose the release?

♦   Will the Labor Department notify an employer that it has released information relating to that employer to a complainant under the Initiative, whether or not this was done pursuant to a request?  If so, what will be the timing and nature of that notification?

♦   How will the Labor Department ensure that its investigations and other activities implicating the Initiative conform to the policies articulated in Section 51a07 of its own Field Operations Handbook (see below), including the one admonishing that "[n]o investigation shall be made of any employer solely to obtain information for use by an employee in a Sec[tion] 16(b) suit" brought under the federal Fair Labor Standards Act?

♦   What "special process", if any, does the Initiative provide for an employer to obtain information from an investigative file?

♦   Will the Labor Department make any determination as to whether matters referred under the Initiative actually involve the FLSA or any other law the Labor Department enforces?  If it will do so, how will it handle inquiries that do not implicate any such laws?

♦   Exactly what will the Labor Department be saying to people it refers to attorneys under the Initiative?

♦   Will the Labor Department's communications be different for referred matters about which it drew no conclusions, versus those as to which it concludes there is a "violation"?  Will those communications characterize a matter as a "violation" in situations in which the file contains no response from the employer?

Stay tuned for further developments.

UPDATE 02/20/11:  On February 17, 2011, we received a letter acknowledging our FOIA request.  The letter bears a handwritten date of February 10 and was postmarked on February 14.  We hope this means that we will receive responsive documents soon.

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FOH Section 51a07.pdf (15.76 kb)

Vigilant employers are taking steps to evaluate or re-assess the status of their compliance with the federal Fair Labor Standards Act and the similar laws of other jurisdictions.  It is wise to do so, but management should also be careful about how and under what circumstances it goes about compiling, communicating, and documenting information relating to these matters. Increasingly, plaintiffs in wage-hour lawsuits are seeking to force employers to produce such materials in the hope of generating useful evidence.

As an illustration, in Craig v. Rite Aid Corp., Case No. 4:08-CV-2317 (M.D. Pa., December 29, 2010)(opinion below), a federal magistrate judge ruled that an employer could not withhold information of this kind from the plaintiffs under what has been called the "self-critical analysis privilege".  In 2008/2009, the employer had voluntarily undertaken an internal analysis of its compliance with the FLSA and other requirements.  Among other things, it had gathered information, produced written assessments, and prepared recommended changes.  The project involved multiple members of the employer's human-resources, operations, and compensation departments under the direction of in-house counsel, and the information had been shared with outside counsel.  The plaintiffs filed their lawsuit for unpaid wages, and they later sought documents and materials that the employer had generated as a part of its review.

The employer contended that the information sought was protected from disclosure by the "self-critical analysis privilege".  Some courts have recognized this privilege under limited circumstances in the interests of encouraging businesses to evaluate their compliance with the law without fear that the process will create evidence that will later be used against them.  However, it is by no means a sure-thing, and in this instance the magistrate judge would not permit the employer to withhold the materials on that basis.

There are other legal principles that might protect an employer against having to surrender such information to the other side, such as the attorney/client privilege and the "work product doctrine" (the latter of which typically relates to information generated in anticipation of litigation).  Indeed, the magistrate judge's ruling did not express an opinion about whether one or both of these might protect against the disclosure sought.

But the take-away is this:  In planning for an internal evaluation of wage-hour compliance, management should give careful thought to matters like:

•   Who will direct and control the process,

•   Who will participate in the assessment, and what each participant's role will be,

•   What will be communicated, and from whom and to whom communications will flow,

•   What documents and other information will be generated or compiled, and when and in what form this will be done,

•   What can be done to bolster the prospects that the components and results of the evaluation can be protected against disclosure in litigation, and

•   How to avoid undercutting any such protections later.

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Craig v. Rite Aid.pdf (61.37 kb)

The U.S. Labor Department/American Bar Association lawyer-referral program we wrote about earlier is underway.  This so-called "Bridge to Justice" is now described on the U.S. Wage and Hour Division's website.

As details continue to emerge, there is cause for heightened concern about how this will be handled.  First, it appears that the potential remains for referrals to be made under circumstances implicating neither the federal Fair Labor Standards Act nor any other law DOL enforces.

Moreover, program descriptions are replete with references to "violations", worker exploitation, "back wages owed", and so on that will serve as a predicate for referring an employee to a lawyer.  But the unfortunate fact is that, at least sometimes, initial DOL determinations of this kind are later shown to be based in whole or in part upon mistaken views of the facts, erroneous legal interpretations, or misapplication of the law to the facts.  In the past, it has usually been possible to work cooperatively with DOL to reach a proper conclusion in these situations.  However, it now seems that employers caught up in some appreciable number of these instances will instead have to devote their already-scarce resources to protracted litigation with unjustifiably emboldened employees and their lawyers.

A referred employee will also "get a form that will allow them or an authorized attorney representative to quickly obtain certain items from the investigation case file."  This is part of the "special process for complainants and representing attorneys to quickly obtain certain relevant case information and documents when available."  DOL says that whether some kinds of information will be released will depend upon the scope of disclosures permitted by the Freedom of Information Act and other provisions, but at present this is cold comfort.  It remains to be seen to what extent and in what ways the flow of information and materials to employees' lawyers will be limited.  While employers must of course abide by their legal obligations in connection with DOL investigations, the existence of this "special process" should cause management to be cautious both in deciding what documents and information will be provided to investigators and in judging how and under what circumstances these things will be disclosed.  For example, employers should be prepared to assert at the very outset the confidential nature of financial and employment-related information.

We have seen no reference to any new "special process" whereby employers can secure case information from DOL's files.

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One might think that the risk of a wage-hour lawsuit couldn't get any higher, but it will soon increase even more.  Vice President Biden and the American Bar Association recently announced that, starting December 13, the U.S. Labor Department will provide a toll-free number to connect people who have made federal Fair Labor Standards Act complaints with an ABA-approved attorney-referral service to help them find a qualified lawyer to handle their claims.  It appears that the Labor Department will do this on matters it concludes it cannot pursue given its limited resources.

In the past, DOL sometimes notified employees of their rights to sue under the FLSA when an employer refused to pay back-wages voluntarily but the government decided that the case was "not suitable for court action" by DOL.  These so-called "16(b) letters" were careful to say that DOL neither encouraged nor discouraged a lawsuit, and that whether to take action was entirely up to the individual.  It remains to be seen whether DOL's communications under this new program will be similarly restrained, but providing ready access to a lawyer might in itself be viewed as already tilting the balance in favor of suing.

Moreover, before DOL sent a "16(b) letter", it had concluded that there was an FLSA violation.  Nothing we have seen to date forecloses the possibility that the new program will include situations in which DOL has no idea whether the employee's claim is valid or even has anything to do with the FLSA's requirements.

So far as we are aware, no DOL/ABA lawyer-referral program is being adopted for employers (regardless of size) faced with allegations that they have run afoul of the FLSA.  Presumably, this is due to the DOL/ABA view that, as ABA President-elect Bill Warren puts it, "Wealthy people may already know or have a lawyer . . .."

It is more important than ever for employers to evaluate their compensation practices right now to see whether they are fully in compliance with the FLSA and with all applicable state or local laws.  Employers should regularly train and re-train payroll employees and appropriate management personnel to ensure that they know how to comply with all wage-hour requirements in the course of doing their jobs, including as to the calculation of worktime totals and the proper amounts of pay.  Furthermore, employers should conduct regular internal wage-hour compliance audits, certainly at least once a year.

This new program will likely also affect how employers go about interacting with the U.S. Wage and Hour Division in connection with investigator inquiries and compliance audits.

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Latest reports suggest that the already-anemic economy has stalled in recent months.  And the hard times seem to be fueling a continued wave of lawsuits by current and former employees over issues like minimum wages and overtime.  A number of these lawsuits seek to hold certain individuals personally responsible for claims for unpaid wages under the federal Fair Labor Standards Act.

The FLSA applies only to employment relationships, so a million-dollar question (sometimes literally) is – who qualifies as an "employer"?  The FLSA says that the term includes "any person acting directly or indirectly in the interest of an employer in relation to an employee."  29 U.S.C. § 203(d).  Thus, in certain circumstances, courts hold that an individual is an FLSA employer so as to be liable – along with any other entity or individual meeting the definition of "employer" – for any back-pay, liquidated damages, attorneys' fees, penalties, costs, or other relief awarded in an FLSA lawsuit.

Whether an individual qualifies as an employer is decided on a case-by-case basis, and the factors considered might vary somewhat from one jurisdiction to another.  Generally speaking, the more control an individual has over the employment relationship, the more likely it is that he or she will be deemed to be an employer.   For instance, an individual who controls the nature, structure, or economics of the employment relationship is likely to be an employer within the meaning of the FLSA.  If an individual maintains a significant level of financial control over a company and/or has a significant role in making personnel decisions and in establishing pay policies, that person is more likely to be deemed an employer under the FLSA.  Consequently, owners, officers, and even managers and HR personnel can find themselves to be the individually-named targets of an FLSA lawsuit.

The bottom line is that individuals can be personally liable for unpaid wages and other remedies under the FLSA, which also means that an individual's own assets could be used to satisfy violations.   Further, as employers continue to struggle financially, naming individuals as defendants might become an increasingly common tactic – suing more defendants means that there could be more pockets from which to collect a judgment.

The federal Fair Labor Standards Act turns 72 years old this year.  Even though today's working world is radically different from that of 1938, the FLSA's principles remain largely unchanged and have become increasingly counterproductive in a global economy.  Many believe that it is imperative to harmonize this strict, unforgiving law with modern realities, including by making it more flexible, more adaptable, and better-attuned to the practical concerns and preferences of present-day employers and employees.

Further evidence of this growing sentiment surfaced last week in the form of a letter from the HR Policy Association to U.S. Labor Secretary Hilda Solis.  In that correspondence, the organization advocated a reform-oriented collaboration among the Labor Department, the HRPA, and other interested parties.  This would be a good starting point, but any meaningful success will depend in substantial part upon whether fundamental legislative changes in the FLSA itself can be brought to fruition.

Any list of proposed FLSA statutory revisions would be a long one, but high priorities should include:

•   A provision assigning at least some legal responsibility to non-exempt employees to report their worktime accurately.  Today, employees sometimes claim months or years after-the-fact that their records reflect less time than they actually worked.  The absence of any FLSA "give" on this means that such claims are routinely credited by the courts and by U.S. Labor Department investigators, even in cases where an employer has in place a policy designed to produce accurate time records, and even when there is room to question whether an employee is being truthful.  Perhaps this could be addressed by, for example, creating a legal presumption that an employee's time records are accurate, if (i) the employee records his or her own hours worked each workday and each workweek; (ii) the employee reviews those records each workweek and certifies that they are correct; and (iii) the employer maintains, enforces, and in practice actually observes a written policy both stating how hours worked are to be recorded and requiring that all hours worked be accurately and correctly recorded each workday and each workweek.

•   An amendment stating that employees may be classified as exempt from the FLSA's minimum-wage, overtime, and timekeeping requirements based upon the amount of their compensation alone.  Even though the FLSA directs the U.S. Labor Department to establish the parameters for certain exemptions, historically the agency has taken the position that it is not currently authorized to adopt any exemption that is based solely upon an employee's compensation level.

•   A modification saying that many, most, or even all bonuses and incentive pay may be excluded from the "regular rate of pay" used to compute FLSA overtime compensation.  At present, overtime must be calculated on most such payments, including even non-cash prizes or awards of various kinds.  The added costs and complications this entails lead many employers to reduce the amounts they are prepared to offer or to forgo offering bonuses or incentives altogether.

•   A section authorizing private-sector employers and employees to have an agreement or understanding permitting the use of compensatory time off in lieu of overtime pay.  At the moment, this is not permitted under the FLSA for non-exempt employees in the private sector – most must receive overtime premium pay for all hours worked over 40 hours in a single workweek, even if they would rather have paid time off instead.  There have been some proposals in this area in recent years, but they have tended to be unduly complicated and/or too narrowly focused, and in some ways they threatened adverse consequences that outweighed the advantages. One possibility would be to adopt an appropriate version of the current FLSA public-sector compensatory-time provision to cover private employers.  Another might be to allow employees and employers to reach an understanding or agreement that overtime compensation will be due only after the employee has worked more than 160 hours in four consecutive workweeks.

•   An increase in the annual-dollar-volume threshold for FLSA "enterprise" coverage to a level higher than $500,000.  This current minimum amount was first set in 1989, and a combination of inflation and other economic developments over the last 20 years means that this sum no longer serves Congress's purpose of excluding many small businesses from the FLSA's requirements.  Consequently, the financial, regulatory, and claims-related burdens of the FLSA fall heavily upon a much-larger segment of small employers than Congress intended.

Of course, many details must be worked through before initiatives like these could be proposed or adopted.  In addition, politically speaking, the FLSA has proven to be especially difficult to change.  But perhaps high unemployment and the still-ailing economy provide atypical motivation for a coalition drawn from employees, employers, and government representatives who favor bringing the law into the 21st century.

Courts and litigants have struggled over how to figure overtime due to an employee who was misclassified as exempt and who was paid a fixed salary for his or her hours worked.  The federal Fair Labor Standards Act requires that non-exempt employees be paid 1.5 times their regular hourly rates for hours worked over 40 in a workweek.

However, for a misclassified salaried employee, satisfying this requirement necessitates a couple of threshold determinations.  First, the regular hourly rate must be derived indirectly and after-the-fact, because the employee was not paid on an hourly basis.

Second, a court must decide how this rate will be used in computing back-pay for hours worked over 40 in a workweek:  Is the employee due 1.5 times this rate for those overtime hours, or is the correct approach to calculate overtime premium by multiplying those hours times one-half of the regular rate?  The answer depends upon whether the employee's salary is seen as having been his or her straight-time pay only for the first 40 hours, or instead for all hours worked. If the salary covered only the first 40 hours, the employee has received no pay for the overtime hours and is owed 1.5 times the rate.  But if the salary was the employee's straight-time compensation for all hours worked in a workweek, including overtime hours, then the employee is due only the half-time overtime premium.  How this gets resolved can have tremendous significance in situations – such as class actions – involving large numbers of overtime hours.

The U.S. Court of Appeals for the Seventh Circuit (Illinois, Indiana, and Wisconsin) recently weighed-in on this in Urnikis-Negro v. American Family Property Services, 2010 WL 3024880 (August 4, 2010)(opinion below).  The plaintiff was misclassified as exempt under the FLSA's administrative exemption, was paid a fixed salary, and worked varying numbers of hours each workweek (usually far exceeding 40).  In fashioning its overtime award, the lower court followed an approach taken by several federal appellate courts and relied upon the U.S. Labor Department's longstanding interpretive rule known as the fluctuating workweek calculation ("FWW") (29 C.F.R § 778.114(a)).  See, e.g., Clements v. Serco, Inc., 530 F.3d 1224, 1230-31 (10th Cir. 2008); Valero v. Putnam Assoc. Inc., 173 F.3d 35, 39 (1st Cir. 1999); Blackmon v. Brookshire Grocery Co., 835 F.2d 1135, 1138-39 (5th Cir. 1988).  The lower court figured a regular rate by dividing the employee's weekly salary by her total hours worked in the workweek, and then calculated her overtime premium by multiplying one-half of that rate times her overtime hours worked in the workweek.  The employee asked the Seventh Circuit to overturn this, contending that the FWW method was inappropriate to her situation.

The Seventh Circuit agreed that the lower court was wrong to rely upon the Labor Department's FWW method as the basis for calculating overtime owed in a misclassification case, concluding that the interpretive rule is forward-looking and is not a remedial measure.  It noted the rule's reference to "a clear mutual understanding" between the employer and the employee, which contemplates a before-the-fact agreement on this method where the employee is paid a fixed salary.  The circuit also observed that the rule speaks of the employee contemporaneously receiving overtime compensation.  In a misclassification situation, the parties have no such mutual understanding, and there is no contemporaneous overtime payment, because the employer has treated the employee as exempt.

Nevertheless, the Seventh Circuit concluded that the lower court reached the correct outcome.  It said that, in the case of a misclassified employee paid a fixed salary to work varying numbers of hours, the regular rate is determined by dividing all of the hours worked in the workweek into the salary for that workweek.  Because the resulting regular rate represents straight-time pay for all the workweek's hours (including overtime ones), the employee is owed the product of multiplying one-half of the regular rate  (i.e., the "half" of "time and one-half") times the total overtime hours.  The circuit relied upon the U.S. Supreme Court's decision in Overnight Motor Transportation Co. v. Missel, 316 U.S. 572 (1942), in which the Supreme Court used this approach under analogous circumstances.  The Supreme Court noted in Missel that its method was consistent with longstanding Labor Department guidance.

Urnikis-Negro represents a principled approach to determining overtime for a misclassified employee.  It avoids the temptation to utilize FWW as a justification, even though the Labor Department's interpretive rule uses the correct arithmetical computation.  Rather, the decision is grounded upon binding Supreme Court precedent, which itself relied upon longstanding, historical guidance from the Labor Department.  In following this clearly correct approach, the circuit was adhering to the guiding general principle on the regular rate, which states: "The regular hourly rate of pay of an employee is determined by dividing his total remuneration for employment (except statutory exclusions) in any workweek by the total number of hours actually worked by him in that workweek for which such compensation was paid."  29 C.F.R. Section 778.109.  Urnikis-Negro provides useful clarification and guidance for employers on a computational issue of potentially enormous practical impact in assessing potential exposure in misclassification cases.

EDITOR'S NOTE:  Urnikis-Negro also cited with approval the Labor Department's Opinion Letter No. FLSA2009-3 (Jan. 14, 2009), which was a response to a 2007 Fisher & Phillips opinion request.  Fisher & Phillips did not invoke FWW in its request, but the Labor Department nonetheless predicated its favorable answer upon those principles.  Our request and the reply can be accessed below.

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2007 Opinion Request.pdf (69.15 kb)

Back-Pay Opinion Letter 01 14 09.pdf (310.29 kb)

Urnikis-Negro v. American Family Property Services.pdf (252.87 kb)

In a major decision with possible relevance outside of the pharmaceutical industry, the Second Circuit U.S. Court of Appeals (Connecticut, New York, and Vermont) gave strong deference to a U.S. Labor Department legal brief and overruled a lower court in deciding that Novartis's pharmaceutical sales reps were not exempt from overtime as outside salespersons or as administrative employees under the federal Fair Labor Standards Act or applicable state laws.  On the same day, the Second Circuit also summarily ruled against Schering in a similar case.

The exemption status of pharmaceutical sales reps (who frequently earn substantial compensation) has been hotly litigated with varying results in recent years.  Consider the following unofficial scorecard:  By our count, prior to the Novartis decision, pharmaceutical companies had an 86% win rate (6 out of 7 cases) in federal district court decisions finding that the FLSA's administrative exemption was applicable.  Pharmaceutical companies had a 71% win rate (12 out of 17 cases) in federal district court decisions finding that the FLSA outside-sales exemption applied to their sales reps.  Many of those cases are on appeal.

On February 2 and March 24, 2010, the Third Circuit (Delaware, New Jersey, Pennsylvania, and the U.S. Virgin Islands) found that a pharmaceutical sales rep at Johnson & Johnson and sales reps at AstraZeneca were exempt under the administrative exemption.  The court did not rule on the FLSA's outside-sales exemption.

The unique, highly-regulated circumstances of the pharmaceutical-sales environment has contributed to the split among the courts deciding these cases, particularly the fact that federal regulations bar the consummation of a sale between a pharmaceutical sales rep and a physician.  As the Second Circuit highlighted in finding that Novartis's reps were not primarily engaged in "making sales" but instead merely promoted drugs to physicians, (1) they could only give free samples; (2) they could not lawfully transfer drug ownership in exchange for anything of value; (3) they could not lawfully take an order for the purchase of drugs; and (4) they could not obtain a physician's binding commitment to prescribe drugs.  Even though the physician is widely considered to be the "linchpin" in the process of choosing drugs to prescribe, federal regulations bar the consummation of a sale between a pharmaceutical sales rep and a physician – the court concluded that fully consummated sales by pharmaceutical companies are made to wholesalers, rather than to physicians.

Several other courts (including the lower court in Novartis's case) have taken a "common sense" approach and held that the pharmaceutical sales reps "make sales in the sense that sales are made in the pharmaceutical industry" and thus qualified for the FLSA's outside-sales exemption.  Moreover, the Novartis lower court found that sales reps were not "robots" or "automatons," as they contended, but that instead they exercised judgment in tailoring presentations to physicians and qualified for the FLSA's administrative exemption.

The Second Circuit disagreed as to both exemptions.  Significantly, the Circuit was heavily influenced by the DOL's interpretations in DOL's friend-of-the-court legal brief supporting the sales reps.  The court believed itself required to grant "controlling deference" to the brief because the DOL's interpretations were not "plainly erroneous or inconsistent with the [DOL's] regulation" on the issues.

These wage-hour battles in the pharmaceutical field are not over, but some of the lessons for employers in any industry include these:

•   Beware so-called "outside sales" employees who are not really making sales within the meaning of the FLSA's outside-sales exemption (such as those who only promote products or services that are actually sold by others).

•   Beware "promotion" or "marketing" employees who are not exercising "discretion and independent judgment in matters of significance" within the meaning of the FLSA's administrative exemption but are instead exercising only "skill in applying well-established techniques, procedures, or specific standards."

•    Because DOL guidance documents and legal briefs can affect the outcome of litigation, think ahead about how DOL might be expected to interpret FLSA exemption rules in the future.

UPDATE 7/23/10:  On July 19, 2010 the U.S. District Court for the District of New Jersey ruled for the employer in Jackson v. Alpharma, Inc., finding that the pharmaceutical sales representatives there were exempt under the FLSA's administrative exemption.  The District of New Jersey is within the Third Circuit, and the court therefore followed the Circuit's February decision in Smith v. Johnson & Johnson which applied the administrative exemption to a pharmaceutical sales rep.

The Jackson court chose not to address the outside sales exemption.  Interestingly, the court also said, "in light of the Third Circuit's clear opinion in Smith .  .  ., the Court does not find it necessary to discuss" the Second Circuit's more-recent Novartis decision.  Further, the court did not mention DOL's amicus brief which was filed in the Novartis appeal and which the Second Circuit said was entitled to "controlling deference" on the administrative exemption in a similar setting.  As Jackson shows, pharmaceutical companies continue to fare better (in terms of percentages) with the FLSA's administrative exemption than with the outside sales exemption.

UPDATE 8/21/10:  In Christopher v. SmithKline Beecham Corp. d/b/a GlaxoSmithKline, 9th Cir., No. 10-15257, the U.S. Labor Department has filed a "Friend of the Court" brief urging the U.S. Court of Appeals to overturn a lower court's finding that Glaxosmithkline pharmaceutical sales representatives qualified for the FLSA's "outside salesman" exemption.

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As we previously reported, the U.S. Wage and Hour Division says that it will no longer provide substantive responses to fact-specific requests for interpretation submitted by employers or other individuals.  At the recent DOL "Stakeholder Forum" in which Fisher & Phillips participated in Washington, D.C., officials indicated that this position includes requests that were pending at the time the new policy was announced.

Instead, from time-to-time the Division intends to release wide-ranging "Administrator Interpretations" announcing its general positions under the Fair Labor Standards Act and related provisions on topics of interest to enforcement officials.  The Division will then apply these AIs across-the-board to all employers and employees affected by the views expressed. Wage and Hour Deputy Administrator Nancy J. Leppink issued the first Administrator Interpretation (stating that the "typical" Mortgage Loan Officer is a non-exempt employee) simultaneously with the Division's announcement.

The position of Wage and Hour Administrator remains vacant, so Fisher & Phillips immediately inquired about both the source of Ms. Leppink's authority to take such positions on the Division's behalf and the status of these AIs as authoritative Division pronouncements.  Acting Deputy Administrator for Enforcement Thomas M. Markey has now advised us (in the letter linked below) that, in the Division's view:

(1)    In the absence of an Administrator, Ms. Leppink is authorized to issue official rulings and interpretations on the Division's behalf; and

(2)    The initial AI (and presumably every future one issued by Ms. Leppink, or an Acting Administrator, or whoever is eventually confirmed as Administrator) is an official ruling of the Division.

It remains to be seen whether as a practical matter this new approach will result in what amounts to rulemaking that should instead take place within the framework of the federal Administrative Procedure Act.  And while AIs will affect how DOL seeks to enforce the FLSA, courts are not required to follow them.

In Skidmore v. Swift & Co., 323 U.S. 134 (1944), the U.S. Supreme Court said that these sorts of interpretations represent "a body of experience and informed judgment" guiding courts as to the FLSA's meaning and application.  However, it also said that their weight as guidance varies according to things like:

•   The thoroughness of the interpretation;

•   The validity of the interpretation's reasoning;

•   Whether and to what extent the interpretation is consistent with other DOL positions; and

•   Other factors giving the interpretation "power to persuade, if lacking power to control".

In the future, there might well be occasions when it is appropriate to challenge an AI on the basis that it should carry no weight, or that it is outside the bounds of the DOL's interpretative purview.

T. M. Markey Correspondence.pdf (81.34 kb)