On June 6, the Second Circuit ruled that pharmaceutical sales representatives (“PRs”) were entitled to overtime under the FLSA because they did not meet the requirements of either the outside sales employees or administrative exemptions. Employers who treat outside salespersons as exempt under either exemption may want to reexamine their policies in light of the Second Circuit’s ruling.

In In re Novartis Wage & Hour Litigation, the Second Circuit held that PRs — who promote their employer’s products but are legally prohibited from selling them to physicians — do not satisfy the outside sales exemption because they “do[] not in any sense make the sale” of the products. In addition, the court held that the PRs do not satisfy the administrative exemption because they do not “exercise [] discretion and independent judgment with respect to matters of significance.” Specifically, the sales representatives: (a) have a budget which they lack discretion to exceed; (b) have no authority to bind the company on any matters of significance (they do not actually “make the sale”); and (c) lack authority to waive or deviate from Novartis’s established policies without prior approval.

Novartis conflicts with the Third Circuit’s ruling in Smith v. Johnson and Johnson, in which the court held that an outside salesperson employed by a Johnson & Johnson subsidiary was an exempt administrative employee. (The court did not rule on the outside sales exemption). The court found that: (1) Smith’s obligation to formulate a strategic plan to maximize sales was “directly related to the management or general business operations of the employer”; and (2) Smith’s description of herself during her deposition as the manager of her own business who could run her own territory as she saw fit indicated that she “exercise[d] discretion and independent judgment with respect to matters of significance.”  The responsibilities of the sales representatives in Novartis appeared to mirror those in Smith. The difference in the outcome of the two cases thus appears attributable to the Smith plaintiff’s characterization of her responsibilities as “managerial” and requiring discretion–a characterization that the Third Circuit emphasized in reaching its decision.  It is unlikely that plaintiffs in future cases will characterize their responsibilities as the Smith plaintiff did.  Therefore, in future cases, Novartis may be more persuasive than Smith.

Novartis’s impact could be significant if courts favor its reasoning over Smith, impacting more than just pharmaceutical sales representatives. In light of Novartis, employers should reassess the exempt status of all employees who engage in promotion of the employer’s product, and otherwise meet the requirements of the outside sales exemption, but do not actually consummate the sale. If there is not a direct, uninterrupted link between an employee’s promotion of a product and the buyer’s purchase of the product, or if the employee does not exercise material discretion and independent judgment, the employee may not be exempt.