Labor: When employees are eligible for multiple FLSA overtime exemptions

Employers should try to keep all their options on the table

Employers who use outside sales representatives have long relied on the Fair Labor Standards Act’s (FLSA) outside sales exemption to justify non-payment of overtime premiums for these employees. Later this year, the Supreme Court will determine whether pharmaceutical sales representatives, who do not actually make any direct sales, satisfy all of the requirements of the FLSA’s outside sales exemption.

In the meantime, the 7th Circuit recently reminded employers that the outside sales exemption is not the only exemption under the FLSA that may apply to an outside pharmaceutical sales representative and that employers generally should keep all FLSA exemption options open when analyzing job classifications.

In Schaefer-LaRose v. Eli Lilly & Co., the court reviewed the work performed by pharmaceutical sales representatives for Eli Lilly and Abbott Laboratories Inc. (the court consolidated the case against Abbott Labs with the Eli Lilly case) and found that these employees generally:

  • Work alone, structure their days without input from their employer and work without direct supervision (although they maintain regular contact with supervisors)
  • Spend the majority of their time trying to gain access to doctors to influence said doctors’ preference for their company’s products
  • Have access to a discretionary budget they can use in various ways to reach particular doctors
  • Develop customized pre-sales call plans designed to maximize the likelihood of selling the company’s products
  • Have to adapt their sales calls in unpredictable ways to accomplish their ultimate goal of persuading a doctor to prescribe their company’s products, despite the fact that their employers maintain tight control of central messages due to the highly regulated nature of the industry
  • Receive a base salary and incentive pay based on the sales made within their territories

Based on these facts, the court held that the representatives satisfied the three-prong administrative exemption test, which requires that the employee:

  1. Be paid on a salary basis
  2. Perform non-manual work directly related to the management or general business operations of the employer
  3. Exercise discretion and independent judgment regarding matters of significance

In addition to reminding employers that multiple FLSA exemptions may apply to a particular job, Schaefer-LaRose is instructive because it sets forth the court’s application of the facts to the administrative exemption test and highlights the fact that the 7th Circuit is willing to disregard the Department of Labor’s (DOL) interpretation of the exemption as amicus curiae.

Employers should bear in mind the potential challenges of keeping all options on the table. The DOL’s current “Right to Know” initiative is a potential challenge. Although the DOL has voluntarily delayed implementation of this rule as of the Fall 2011 Unified Agenda, it will likely revive this effort in the near future, especially if President Barack Obama is re-elected. Under this rule, the DOL intends to make employers more “open and transparent” to their employees.

As originally proposed, the rule would require employers who classify an employee as exempt to:

  • Perform the exemption analysis
  • Provide the employee the analysis
  • Maintain a copy of the analysis in its wage and hour records

The DOL claims that the goals under the “Right to Know” rule are “to foster more openness and transparency in demonstrating employers’ compliance with applicable requirements to their workers, to better ensure compliance by regulated entities, and to assist in enforcement.”

Regardless of the DOL’s intentions, this initiative could potentially have the effect of eliminating an employer’s ability to argue alternative exemptions, just as Eli Lilly and Abbott Labs did. The risk of such a waiver would likely increase if an employer only provides one exemption analysis as the basis for its classification determination.

In addition, oftentimes employers provide employees offer letters stating the basis for the exemption, potentially waiving their ability to rely on other exemptions in the process. Likewise, employers can end up waiving alternative exemption arguments during litigation by focusing only on one potential exemption option.

Consider this a reminder to keep all FLSA exemption options on the table when analyzing job classifications and thoughtfully weigh the pros and cons of explaining the basis for an exemption to employees.

Contributing Author

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Christine McLaughlin

Christine Liu McLaughlin is a shareholder in Godfrey & Kahn, S.C.'s Labor & Employment Law Practice Group in the Milwaukee office and is chair of the firm's...

Additional Contributors: Rufino Gaytán

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