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RumbergerKirk Attorney Sally Culley Discusses the Impact of the Novartis Decision on Employers

RumbergerKirk Attorney Sally Culley Discusses the Impact of the Novartis Decision on Employers

On July 6, 2010, the U.S. Court of Appeals for the Second Circuit ruled that approximately 2500 pharmaceutical sales representatives employed by Novartis Pharmaceuticals Corporation were entitled to the payment of overtime wages. This ruling turns on its head the general thought that pharmaceutical sales representatives were exempt from the overtime requirements of the Fair Labor Standards Act (“FLSA”). Any employer of sales representatives, particularly pharmaceutical sales representatives, will want to be familiar with this case.

Under the FLSA, employers are generally required to pay their employees overtime (calculated as time and ½) for all time worked over 40 hours in a week. There are several exemptions to this, however. Accordingly, if an employee falls into one of the exemptions, then an employer is not required under the FLSA to pay that employee overtime.

In the Novartis case, approximately 2500 current and former pharmaceutical sales representatives employed by Novartis sought millions of dollars in back pay for overtime allegedly worked by the sales representatives. On a motion for summary judgment, Novartis argued that the sales representatives were exempt from the requirements of the FLSA under both the “outside sales” and “administrative” exemptions. The District Court agreed, and entered summary judgment in favor of Novartis and against the plaintiffs.

On appeal to the Second Circuit Court of Appeals, however, the District Court’s decision was vacated. Relying on the Regulations promulgated under the FLSA by the Department of Labor, the Court determined that the pharmaceutical sales representatives were not exempt under either the outside sales or the administrative exemptions.

With regard to the outside sales exemption, the Court took a very narrow view and held that the sales representatives did not make sales, as required by the Regulations, because they did not actually sell anything. Although there was evidence that the sales representatives met with physicians, explained their products, and attempted to obtain statements from the physicians that they would prescribe those products where appropriate, the representatives did not sell anything to the physicians. The Court found that “a person who merely promotes a product that will be sold by another person does not…make that sale.” In re Novartis at *11.

With regard to the administrative exemption, the relevant issue was whether the “primary duty” of the pharmaceutical sales representatives included the “exercise of discretion and independent judgment.” In re Novartis at *13. The Court noted that the sales representatives were heavily regulated and controlled insofar as what they could say or do. Novartis argued that, even so, the sales representatives exercised discretion in when and how to visit physicians, how to allocate their budgets for promotional events, and how to allocate their samples. However, the Court minimized those things and held that the sales representatives were not “sufficiently allowed to exercise either discretion or independent judgment in the performance of their primary duties.” In re Novartis at *15.

Because the Court found the outside sales and administrative exemptions to be inapplicable to the pharmaceutical sales representatives, the summary judgment entered in favor of Novartis was vacated and the case was sent back to the District Court for further proceedings. Unless Novartis can prove that its pharmaceutical sales representatives are exempt from the requirements of the FLSA under one of the other available exemptions, then it is facing a multi-million dollar judgment in favor of its pharmaceutical sales representatives, for payment of back overtime, interest, and attorneys’ fees.

If you employ sales representatives and currently have them classified as exempt, you will want to take a second look at your employee classifications in light of the Novartis decision. If you would like assistance in conducting this review, please contact one of the labor and employment lawyers at RumbergerKirk, P.A.

[1] In re Novartis Wage and Hour Litigation, 2010 WL 2667337 (2nd Cir. July 6, 2010)

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