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Is the Administrative Exemption a Cure for the Pharmaceutical Industry’s Wage-and-Hour Headaches?

The pharmaceutical industry has been put under the microscope recently in several wage-and-hour cases dealing with the classification of sales representatives.  Traditionally, the industry had classified these employees as exempt from the overtime and minimum wage requirements of the Fair Labor Standards Act on the theory that they met the “outside sales” exemption.  Although the Ninth Circuit Court of Appeals agreed with this classification, the Second Circuit left the industry reeling when it declared pharmaceutical representatives were not exempt because the non-binding commitments obtained from physicians were not “sales.”

While the industry awaits a Supreme Court decision on the outside sales exemption, the Seventh Circuit ruled last week that the administrative exemption applies to pharmaceutical representatives.  The Ninth Circuit did not consider this, but the Second Circuit rejected this exemption too.    If the Supreme Court holds that the outside sales exemption does not apply, the applicability of the administrative exemption will take on heightened importance.

In the past, the administrative exemption has been a black hole due to its imprecise parameters.  The primary duty of administrative-exempt employees must be “performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers” and must include “the exercise of discretion and independent judgment with respect to matters of significance.”  The imprecision of these terms led many employers to treat far too many employees as exempt under this rule.  But the imprecision of this exemption saved the employer in the Seventh Circuit pharmaceutical case, where the court found the exemption applied because the employees marketed the employer’s business and exercised meaningful discretion in how they tailored the message, even though their marketing efforts were scripted by the employer and constrained by government regulation.  Only time will tell whether other circuits and the Supreme Court embrace this approach.

Employers seeking to treat employees as exempt under the administrative exemption should proceed with caution.  The law in this area is not well settled, and even innocent mistakes can cost millions.  And, scrutiny is up among administrative agencies, including state and federal labor departments.  Before determining that employees are exempt, particularly under the administrative exemption, employers should consult with counsel experienced in wage-and-hour issues.  While the administrative exemption may spare the pharmaceutical industry, you must independently assess how it will apply to your employees.

Brody and Associates regularly advises management on complying with state and federal employment laws including wage-and-hour laws.  If we can be of assistance in this area, please contact us at info@brodyandassociates.com or 203.965.0560.