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According to a well-reasoned opinion issued in August 2010 by the United States Court of Appeals for the Seventh Circuit, such a declaration can make an astounding difference in the damages payout should the employer be liable on the exemption question.  The court in Urnikis-Negro v. American Family Property Servs. focused on this nagging question:  When determining how much overtime pay the employer owes the employee after losing a misclassification case, what is the regular hourly rate?

Courts have been split on this issue for years.  Assume that an employee earns a weekly salary of $1,000 and works 50 hours during some weeks.  Some courts have held that the regular hourly rate is $1,000 divided by 40 − the trigger point for overtime − which is $25.  Those courts then have held that damages for the week are calculated by multiplying 1½ by $25 for the 10 overtime hours.  That’s $375.

Other courts have held that the regular hourly rate is $1,000 divided by 50 − the actual number of hours worked − which is $20.  Next, because the employee already has been paid his regular hourly rate for each of the 50 hours he worked, the overtime owed is calculated by multiplying ½ (not 1½) by $20 for the 10 overtime hours.  That’s $100.

The difference is mammoth when defending a class action in which each plaintiff has worked a significant number of overtime hours.

The Urnikis-Negro court adopted the results of those courts that use the large divisor, which is favorable for employers.  But it rejected the reasoning of all courts that have tackled this issue.  Courts previously have made their decisions based on an interpretation of a Department of Labor regulation concerning the “fluctuating workweek” method for determining whether an employee has worked compensable overtime hours.  The Urnikis-Negro court ruled that the DOL regulation has no bearing on the analysis in misclassification cases.

The Urnikis-Negro court instead relied upon the simple logic of a 1942 Supreme Court case, which held that the regular rate is to be based on what the parties have agreed the employee will be paid for the hours he actually works.  In other words, the question becomes:  For what number of hours was the employee’s fixed weekly wage intended to compensate him?

To better position themselves, employers should commit this to writing early in the employment relationship, even through an offer letter.  Something along these lines will assist:  “Your hours in this position may fluctuate, and each weekly portion of your $52,000 salary will compensate you for all hours you work during that week.”  This will greatly undermine any argument by the employee that the salary was intended to compensate him for 40 hours weekly.

Given that Urnikis-Negro contains the most detailed analysis of this issue to emerge from a U.S. Court of Appeals, its guidance is recommended for consideration.

In Jirak v. Abbott Laboratories, Inc., No. 07-3626 (N.D. Ill. June 10, 2010), Abbott Laboratories claimed that its pharmaceutical sales representatives qualified for both the outside sales and the administrative exemptions under the FLSA.  The U.S. District Court for the Northern District of Illinois, however, disagreed. 

The sales representatives’ duties involved calling on physicians to educate them about Abbott Laboratories’ products and to gain a commitment that the physician would write patient prescriptions for these products in medically appropriate circumstances. The Court held that the Abbott’s Laboratories’ sales representatives did not qualify for the outside sales exemption because their activities did not result in a sale or order, such as a contract or enforceable commitment by the physician to write prescriptions, to satisfy the “making sales” requirement of the exemption. Instead, the judge found that the sales representatives’ activities were more akin to promotional activities that stimulated sales for another department of Abbott Laboratories.

The Court also held that Abbott Laboratories’ sales representatives did not qualify for the administrative exemption because they did not exercise sufficient discretion and independent judgment in the performance of their jobs.  Distinguishing other cases in which federal courts determined that pharmaceutical sales representatives qualified for the administrative exemption, based on such details as a sales representative’s own testimony regarding the autonomy of the position, the Court found that Abbott Laboratories’ sales representatives merely applied “well-established techniques and procedures” by calling on the doctors on their call lists with the expected frequency to deliver Abbott Laboratories’ designated sales message.

The sales representative job remains controversial and may qualify for either administrative or outside sales exemptions, and the determinations by the various courts have turned on fact specific findings in each case, the duties of the representative, the performance of those duties day-to-day and the testimony presented in each case. The Abbott Laboratories decision departs from holdings in the Third Circuit and other District Court decisions. Stay tuned for further developments on this topic because decisions are pending in both the Ninth and the Second Circuits on the exemption status of other pharmaceutical industry sales representatives.

The structure of an employee’s job is crucial to a determination of whether it qualifies for an exemption under the FLSA.  As this federal court decision adds to the various conflicting decisions across the country, prudent employers should review the job descriptions and the actual job duties of their sales representatives to ensure the highest possible chance that a court would find an exemption is applicable.