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WINNER TAKES ALL: Supreme Court to Determine if Pharma Reps Should Be Classified as "Exempt"...

They call it the Supreme Court for a reason, right?  It's supreme.  It's the "decider".

And the Supreme Court has one coming up that all of you should be interested in.  It's deciding whether Love-and-Other-Drugs pharma reps - those well dressed, good looking professionals who come in the doctor's office peddling their wares when you are there looking haggered, sick and generally untouchable - should be classified as exempt, or whether they in fact deserve overtime pay.

More on what's being decided in the case from the US Supreme Courts' blog (they've got a pretty good one):

"On April 16, the Court will hear arguments in Christopher v. SmithKline Beecham Corp. The Justices will decide, once and for all, whether pharmaceutical sales representatives (PSRs) are “outside salesmen” and thus exempted from overtime-pay requirements of the Fair Labor Standards Act of 1938 (FLSA) The decision will also settle a circuit split between the Second and Ninth Circuits:  the former held that PSRs are not outside salesmen and thus are not exempted from the FLSA’s requirement that they be paid overtime wages, while the Ninth Circuit (in this case) unanimously reached the contrary conclusion. This will be an interesting case with wide-ranging ramifications for the pharmaceutical industry and the ninety thousand people nationwide employed as PSRs."

More on the work duties and who the pharma reps are selling to:

"To understand the typical duties of a PSR, it is necessary to understand the concept of an “ultimate user” in pharmaceutical lingo. An “ultimate user” is the patient who actually takes the prescribed medicine. Under the Controlled Substances Act of 1970, no one, including drug manufacturers, can dispense prescription medicine without a physician’s authorization. Because the drug manufacturers cannot sell their prescription medications directly to the public, they sell the medications to distributors or retail pharmacies, who then dispense the medications to an “ultimate user” who presents a proper physician’s authorization.

Within this framework, Glaxo employs PSRs to make calls on physicians. At a call, the PSRs will typically present information and samples to the physician and attempt to convince the physician to prescribe their employer’s pharmaceuticals instead of the competition’s.

PSRs work almost entirely outside of Glaxo’s offices. Most of a PSR’s time is spent traveling to physicians’ offices within a specified geographic region. A PSR will ordinarily make eight to ten physician calls per day, usually between 8:30 a.m. and 5:00 p.m.  When not making physician calls, PSRs will study Glaxo products and relevant disease states. They will prepare new presentation modules, respond to phone calls and e-mails, generate reports, and attend evening and weekend seminars. These tasks are typically performed outside of customary business hours.

Of critical importance to this case is the fact that PSRs cannot sell samples, take orders for any medications, or negotiate drug prices or contracts with physicians or users. Instead, they can only try to convince physicians to prescribe Glaxo products instead of its competitors’ products."

Now, what the court is trying to decide:

"There are two issues before the Court.  The first is whether it owes deference to the Department of Labor’s interpretation of its regulations. The second is whether PSRs are outside salesmen when they cannot legally sell prescription drugs, but instead can only encourage physicians to prescribe their employer’s drugs.

In both the Second Circuit and this case, the Secretary of Labor filed an amicusbrief in support of the PSRs. However, the courts in each of those cases split on whether the Secretary’s interpretation of the Department’s regulations warranted deference:  the Second Circuit held that it did, while the Ninth Circuit held that it did not."

Interesting stuff.  Here's how they are currently comped according to the details on the USSC blog:

"For their services, PSRs receive two types of payment: salary and incentive-based compensation. Glaxo aims to have its PSRs receive seventy-five percent of their payment as salary and twenty-five percent as incentive-based compensation. However, the amount of incentive-based compensation a PSR can receive is unlimited. In general, a PSR’s incentive-based compensation is calculated by measuring the increase of Glaxo’s market share for a particular drug within the PSR’s territory."

For a deeper dive on what pharma reps make, see this breakdown over at Recruitingblogs.com. Basically, pharma rep comp differs by company (makes sense - what primary product lines are they selling), but a good rule of thumb is salary of 60-70K and total comp of 90-110K.

Sound like an hourly job to you?   I'm also wondering aloud if the objection is that they aren't true outside sales professionals, they're still marketing professionals who have discretion about when/where/how they do their jobs, right?  The world has gone insane.  Pharma reps who make 100K are now before the Supreme Court with a 50/50 shot at getting overtime.

If that's the case and the court decides in favor of the reps, then if I'm a comp professional, I'm turning the model upside down.  Incentive pay goes away (and along with it, the ability to double your base) and I'm paying an hourly rate that factors in OT and reduces total comp to 85-90% of what I'm currently paying.

You know - just good enough to keep the talent in the job - but there's no way if the pharma industry loses the case that they're simply going to increase their talent comp structure by 15-20%.

And that, my friends, is what people who file and drive these cases don't understand.  The attorneys win again, and 90,000 pharma reps end up with a decreased ability to earn.  Nice.

Comments

Joey

KD,
Your solution sounds a little spiteful. Wouldn't getting rid of incentive pay altogether just move the reps focus to the time clock instead of sales/revenue. Sounds like a recipe for mediocrity to me.

HRAthletics

Part of what drives these cases is the 2 or 3 year statute of limitations. You get an employee, or attorney, who doesn't care about the implications and sees a chance for a payday over a legal technicality. There's no way overtime was intended for pharma sales reps who call the clients they want, visit the clients they want and, if you have connections, can literally work the hours they want and still grow market share.

Speaking of growing market share, how is this not considered sales? You may not sell drugs to patients, but the patients don't decide what drugs they take. The customer is not the patient, it's clearly the physician. They make the decision as to which product is used. The lack of a direct buy/sell relationship doesn't change the fact that physicians are buyers and determine if you're growing market share or not.

Even still the administrative or professional exemption would still apply. Exercise of discretion, independent judgement, advanced knowledge in a field of science... Come on! Pharma reps are not Pepsi/Frito sales reps that primarily drop of product and occasionally perform light sales/customer service activities. They primarily find new business and sell. No one's explicitly telling the pharma rep where to go, what to do and who to interact with.

Any time a law starts with the word "fair", it means that it's really "unfair" for the high performers. I'm a registered Independent, but thank God for a Conservative leaning Supreme Court...

J Rieder

To me this sounds like it can open many cans of worms for other sales professionals who must sell through a distributor network.

For example, liquor sales. Supplier representatives cannot sell to the drinker - they sell to distributors who then sell to bars/stores. Does that fall within this same realm? Sounds like it to me. What would that to to Coors, AB, Corona and myriad of other businesses who must operate this way?

Interviewer

So many pharma reps don't make 100K. But some recruiter told them they could make that, and when they didn't make it their first year, or even their second year, they took one hour out of those 60-hour weeks to sit down and figure out what their overtime rate was for their base salary, and figured out they would make more in OT than they would in incentives. And suddenly, it became a different game.

Working 60 hour weeks for seemingly nothing, they have grown to resent the heck out of the decision they made to give up the work-life balance to make the big money that they can't seem to earn, no matter how many waiting rooms they sit in or physician dinners they organize.

I think HRAthletics brought up some excellent points that the justices will hammer on the attorneys to get a clear answer. Can't wait to see how the Supremes rule on this one.

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