9th Circuit Holds Pharmaceutical Salespersons Qualify As Exempt Employees Under The FLSA Outside Salesperson Exemption

By Yona Conzevoy

In Christopher v. SmithKline Beecham Corporation, an overtime case brought by pharmaceutical sales representatives (“PSR’s”), the United States Court of Appeals for the Ninth Circuit affirmed the District Court’s summary judgment for the employer, holding the plaintiffs were outside salespersons and therefore exempt from the overtime pay requirements of the Fair Labor Standards Act ("FLSA"). 

SmithKline Beecham Corporation (“Glaxo”) hired plaintiffs in 2003 to meet with physicians and encourage them to prescribe Glaxo pharmaceuticals.  Plaintiffs spent most of their time traveling to the offices of physicians within their assigned territories.  Plaintiffs claimed they worked between 10 and 20 hours each week outside of normal business hours, for which they received no overtime wages.  Plaintiffs did not sell the drugs or negotiate prices or contracts with physicians, rather, they attempted to, and did obtain commitments from physicians to use Glaxo products when appropriate.  Plaintiffs received a salary and incentive-based compensation, which was paid if market share, sales volume, revenue, or dose volume increased in their sales territory.

Plaintiffs, and the Secretary of the Department of Labor ("DOL") appearing as amicus curiae (friends of the court) in a similar case in the United States Court of Appeals for the Second Circuit, In re Novartis Wage & Hour Litig., 611 F.3d 141 (2d Cir. 2010), claimed that the PSR’s did not meet the FLSA Outside Sales Exemption for overtime because  they did not “make sales” as defined by the Department of Labor regulations 29 C.F.R. §541.501(b).  The Novartis court held: “Where the employee promotes a pharmaceutical product to a physician but can transfer to the physician nothing more than free samples and cannot lawfully transfer ownership of any quantity of the drug in exchange for anything of value, cannot lawfully take an order for its purchase, and cannot lawfully even obtain from the physician a binding commitment to prescribe it, we conclude that it is not plainly erroneous to conclude that the employee has not in any sense, within the meaning of the statute or the regulations, made a sale.”  Id. at 154. 

However, the Ninth Circuit court rejected the reasoning of the Secretary and the Novartis court on the grounds the Secretary of Labor's interpretation of the FLSA was merely a restatement of the statutory language, and the Secretary of Labor's position was inconsistent with the DOL’s own regulations and prior practices.  Since 1940, the Secretary has defined the phrase “other disposition” in the statute’s definition of “sale” as a broad catch-all category, and has allowed PSR’s to fall under the outside salesmen exemption.  Because salespersons in the pharmaceutical industry are not selling to patients (who cannot legally choose which drug to use and therefore cannot be characterized as buyers) and are instead obtaining commitment from physicians to prescribe Glaxo's products, the PSR's are in effect making sales.  Further, even though the commitments to prescribe pharmaceuticals is not binding on the physicians, the pharmaceutical manufacturers value these commitments enough to reward pay to PSRs sales commissions based on those non-binding commitments.  Finally, the Court applied the paradigm outside salesperson case Jewel Tea Co. v. Williams 118 F.2d 202 (10^th Cir. 1941), which justified the application of the outside sales exemption to the Glaxo PSR's because the activities of the PSR’s were substantially the same as the outside salespersons in Jewel Tea.  . . . 

While this case establishes that PSR's qualify for the outside sales exemption under Federal law, under California State law, it is not quite as clear whether the PSR's qualify for the outside salespersons exemption under Labor Code section 1171 Industrial Welfare Commission wage orders.  While federal law focuses on whether the employee's primary function is making sales, California law focuses exclusively on whether the individual works more than half the working time selling or obtaining orders or contracts.  The language of the wage orders define an Outside Salesperson as "any person . . . who customarily and regularly works more than half the working time away from the employer's place of business selling tangible . . . items or obtaining orders or contracts for products . . ."  The PSR's in this case clearly spent more than half their working time obtaining commitments from physicians, but it is unclear whether California would interpret the language of the Wage Orders broadly enough to allow the PSR's to be considered outside salespersons given that PSRs typically do not make actual sales.  Furthermore, now that the Ninth Circuit's ruling conflicts with the Second Circuit's holding in Novartis, it is possible that the United States Supreme Court will address this issue.

 

Court of Appeal Reiterates That Non-Employers Are Not Liable For Wages

By Yona Consevoy and Christopher S. Andre 

In Futrell v. Payday California, Inc., et al., a class action case involving overtime claims against a payroll company that prepared and issued plaintiff’s paychecks, W-2’s and related documents, the California Court of Appeal affirmed the trial court's grant of summary judgment dismissing the plaintiff’s action against the payroll company on grounds that the payroll company was not the plaintiff’s “employer.”

John Futrell provided security and crowd control services for Reactor Films, Inc., a company that produces television commercials. In 2006, Futrell brought a class action lawsuit against Reactor Films and Payday California (“Payday”), the payroll company that provided payroll processing for Reactor Films, alleging he worked overtime on several different projects for Reactor and was not compensated at the proper rate. Specifically, he alleged he was paid one and one-half times his regular rate of pay for hours worked in excess of eight hours in a workday but should have been paid double his regular rate of pay for all of those hours in excess of twelve hours in a workday and was therefore owed $126.00.  Futrell claimed he was an employee of Payday because it acted as a joint employer with Reactor Films during the course of several television commercial productions, and his pay stubs, W2 certificates, and paychecks identified Payday as his “employer.”

The trial court issued its ruling that Futrell was not “employed” by Payday before the California Supreme Court decided Martinez v. Combs (2010) 49 Cal. 4th 35, previously discussed here, which sets forth three alternative definitions of employment to determine whether an employer-employee relationship exists. The Court of Appeal affirmed the trial court’s ruling in light of the Martinez case, finding that Payday was not Futrell’s employer for purposes of sections 203, 226, 510, and 1194 of the Labor Code, or for purposes of the Fair Labor Standards Act ("FLSA").

The Court of Appeal found that the three part test required by Martinez to determine whether an employer-employee relationship exists was not satisfied: 1) Payday did not exercise control over Futrell’s hours or working conditions by issuing paychecks and calculating pay and tax withholding; 2) Payday did not suffer or permit Futrell to work because there was no evidence showing Payday had the power to either cause Futrell to work or prevent him from working; and 3) under the common law test of employment, which considers whether the alleged employer “controlled the details” of the employee’s activities, Payday did not control the details of Futrell’s activities, as Payday did not direct or supervise Futrell at the production sites, Payday did not provide any tools, or the place of work, to Futrell, Payday did not set Futrell’s pay, and the crowd and traffic control services performed by Futrell were not for Payday’s benefit, nor are such jobs an integral part of payday’s regular business operations.

The Court of Appeal also found that under the FLSA’s “economic reality test” which determines whether persons are employer and employee for purposes of the FLSA, Payday prepared paychecks for Futrell for the work he performed on behalf of his actual employer, Reactor Films.

Finally, the Court of Appeal affirmed that it follows the California Supreme Court’s ruling in Reynolds v. Bement that agents or corporate officers of an employer are not personally liable in an action for unpaid overtime under Labor Code section 1194. 

This decision is important because it reiterates that persons and entities other than a person's "employer," such as corporate officers and directors, supervisors, parent corporations, franchisors, and affiliated entities, ordinarily are not liable for alleged failures to comply with various wage and hour provisions of the Labor Code or with Industrial Welfare Commission Wage Orders.

Department of Labor Administrative Interpretation States Duties Of Mortgage Loan Officers Do Not Qualify As Exempt Duties

By Ronald W. Novotny

As we previously reported here, On March 24, 2010, the United States Department of Labor ("DOL") Wage and Hour Division made a significant change in its compliance assistance by moving from its longstanding practice of issuing fact specific opinion letters to issuing more general, across-the-board Administrator's Interpretations. The change is significant because it likely signals the DOL's intention to more aggressively establish its own interpretation of federal wage and hour laws.

In the first such Administrator's Interpretation, the DOL revisited the seemingly settled issue of whether mortgage loan officers qualify as exempt employees under the Fair Labor Standards Act ("FLSA"). Reversing two prior determinations that mortgage loan officers ordinarily qualify as exempt employees and therefore not entitled to be paid premium pay when they work overtime, the DOL now takes the position that the routine duties of such employees do not qualify as exempt duties.

The DOL defined the position as persons employed by financial institutions as mortgage loan officers, representatives, consultants, or originators. The typical duties include receiving internal leads, contacting potential customers, collecting required information from customers and entering that information into a computer, assessing and recommending loan products, and compiling customer documents for handling by underwriters or loan processors.

The DOL revisited the issue of whether such duties should be characterized as "non-manual work directly related to the management or general business operations of the employer or its customers" and therefore within the scope of the "administrative employee" exemption from the premium pay requirements of the FLSA.

The DOL now concludes that loan officers do not qualify as exempt employees because the work they perform is predominantly "production work" and not "administrative work." Likening mortgage loan officers to inside salespersons, the DOL now characterizes loan officers' duties as the "production work of an employer engaged in selling or brokering mortgage loan products" and not related to internal management of the business. The DOL now takes the position also that loan officers' duties do not relate to the "general business operations" of the employer's customers (who are typically individual consumers).

As part of its interpretation, the DOL withdrew a 2001 opinion letter and a 2006 opinion letter stating mortgage loan officers can qualify as exempt employees.

We think this new administrative interpretation signals a willingness on the part of the Obama Administration to reverse prior administrative interpretations interpreting FLSA exemptions more broadly.

Although this more recent administrative interpretation is not binding on the courts, current or former employees asserting they are or were misclassified as exempt employees can cite to this new administrative interpretation as persuasive authority from the administrative agency charged with enforcement of the FLSA.

In light of this new interpretation, financial institutions should consider consulting with experienced counsel to determine whether employees previously thought to be exempt would still be considered exempt employees.

Click here to download and to read a copy of the administrative interpretation.

9th Circuit Holds That Time Spent Donning And Doffing Police Uniforms And Gear Is Not Compensable Under The FLSA

By Christopher S. Andre

Today, in Bamonte v. City of Mesa, the Ninth Circuit Court of Appeals held that the time police officers spend putting on and taking off their police uniforms and police gear is not compensable time under Federal law under the Fair Labor Standards Act and the Portal-to-Portal Act because the City of Mesa did not require the officers to put on or take off their uniforms and gear at the workplace. The court explained that while the officers might for valid reasons prefer to put on and take off their uniforms and gear at the workplace and not at home, that preference on the part of the officers did not render the time spent performing those tasks compensable time.

As we previously reported here and here, there are important differences between what an employer is required to do under Federal law under the Fair Labor Standards Act and what an employer is required to do under California law. Private employers in California should note that a California court would apply different standards to determine whether the time employees spend putting on or taking off uniforms and/or work related gear is or is not compensable time.

Click here to download and to read a copy of the opinion.

9th Circuit Court of Appeals Addresses Compensability Of Preliminary And Postliminary Activity Under FLSA

By Christopher S. Andre and Ronald W. Novotny

On March 2, 2010, in Rutti v. Lojack Corporation, Inc., ("Rutti II") the Ninth Circuit Court of Appeals withdrew its previous decision at 578 F.3d 1084 (9th Cir. 2009) ("Rutti I") and revisited its holdings regarding the extent to which commuting time is compensable time, the extent to which work related activities before work begins is compensable time, and the extent to which work related activities after work ends is compensable time under Federal law under the Fair Labor Standards Act and under the Portal-to-Portal Act as amended by the Employee Commuter Flexibility Act.

Rutti was employed by Lojack as technician to install and repair vehicle recovery systems in customers' cars. His duties required him to commute using a vehicle supplied by Lojack. He was paid on an hourly basis beginning when he arrived at the first job of the day and ending when he completed the last job of the day.

Rutti alleged Lojack was required to pay him and approximately 450 other technicians for time spent in the morning receiving assignments, mapping his routes, and prioritizing his jobs; for time spent driving from his home to the first job of the day and for time spent driving from the last job of the day to his home; and for time spent in the evening uploading data about jobs performed each day.

Based on the trial court record and on Federal law, the court held in Rutti II:

1. Lojack was not required to pay Rutti for his morning preliminary activities because those activities were related to his commute, which is presumptively non-compensable under the FLSA, were not integral to Rutti's principle work activities, and appeared to be de minimis time in any event and therefore non-compensable even if otherwise compensable.

2. Lojack was not required to pay Rutti for commuting time even though Lojack placed restrictions on how Rutti could use the vehicle Lojack supplied to him because those restrictions were not so severe as to make the commuting time compensable.

3. Uploading data each evening appeared to be "part of the regular work of" Rutti and therefore compensable in nature, but Lojack might or might not be required to pay Rutti for those evening postliminary activities depending on whether that time is later determined to be de minimis or not. The court remanded that issue to the trial court for further consideration.

4. The record did not support the trial court's grant of summary judgment in favor of Lojack on Rutti's claims under California law, and the court remanded that issue to the trial court for further proceedings.

As previously reported here, there are important differences between what employers are required to do by the FLSA and what employers are required to do by California law. This case further illustrates some of those differences and how conduct permitted under Federal law might not be lawful under California law.

Click here to download and to read the decision.

Ninth Circuit Decision Clarifies Tip Pooling Rules Under Federal Law: A Cautionary Tale

By Christopher S. Andre and Scott K. Dauscher

On February 23, 2010, in Cumbie v. Woody Woo, Inc., the Ninth Circuit Court of Appeal held that an employer that pays its wait staff a wage greater than the minimum wages does not violate the Fair Labor Standards Act ("FLSA") by requiring its wait staff to participate in a tip pool that redistributes approximately 55% to 70% of their tips to employees who are not customarily tipped, such as dishwashers and cooks.

The Ninth Circuit agreed with the trial court there was no violation of the FLSA because the FLSA does not restrict which employees may share in a tip pool so long as the employer does not apply a portion of an employee's tips toward payment of the Federal minimum wage, and Woody Woo paid its wait staff wages greater than the Federal minimum wage. On the other hand, when an employer does take such a "tip credit," tips can be distributed only to employees "who customarily and regularly receive tips."

We refer to the decision as a cautionary tale because California employers are subject to both Federal law and California law, which frequently overlap. When Federal law and California law overlap, an employer is generally required to comply with the law that is most favorable to the employee. An employment practice lawful under Federal law might violate California law and vice versa. For example, while the FLSA permits an employer in some circumstances to apply a portion of an employee's tips toward payment of the Federal minimum wage, California Labor Code Section 351 forbids that practice entirely.

Click here to download and read the decision.

Click here to download and read the Fair Labor Standards Act

Click here to download and read California Labor Code Section 351.