Who’s The Boss: Third Circuit Announces Joint Employer Test for FLSA Cases, Opening the Door to Broader Exposure to Wage and Hour Liability

By:  Meredith R. Murphy

On June 29, 2012 the Third Circuit responded for the first time to a question pondered by many employers and courts within its judicial districts: what constitutes a “joint employer” under the FLSA?  In a case captioned In re: Enterprise Rent-a-Car Wage & Hour Employment Practices Litigation, the Third Circuit announced a four part, multi-factor test as an answer to this question.

In the Enterprise case, the joint employer question was raised as a result of the filing of a collective action by assistant branch managers at subsidiaries of Enterprise Holdings, Inc., seeking overtime pay under the Fair Labor Standards Act (FLSA).  While these assistant managers were employees of Enterprise Holdings’ subsidiaries, they nevertheless sought relief from Enterprise Holdings on the theory that it was a joint employer.

In answering whether Enterprise Holdings falls within the category of “joint employer,” the Third Circuit noted that the definition of “employer” under the FLSA is “the broadest definition that has ever been included in any one act.”  Emphasizing that the definition of employer focuses on “control,” the Third Circuit concluded that ultimate control over employees is not necessarily required and even “indirect” control may be sufficient

To determine whether a party is a “joint employer,” and thereby subject to FLSA liability, the Third Circuit adopted the following analysis:

Does the alleged employer have:

  1. Authority to hire and fire employees;
  2. Authority to promulgate work rules and assignments, and set conditions of employment, including compensation, benefits, hours and work schedules, including the rate and method of payment;
  3. Day-to-day supervision, including employee discipline; and
  4. Control of employee records, including payroll, insurance, taxes, and the like.

The Third Circuit emphasized that the factors identified do not constitute an exhaustive list and should not be “blindly applied.”  Rather, under the Third Circuit’s guidance, courts are to look to the “total employment situation” and “economic realities of the work relationship.”

How did Enterprise Holdings, the sole stockholder of thirty-eight domestic subsidiaries, avoid the label of “joint employer”?  Even despite finding that a three-member board of directors for each subsidiary consisted of the same people who sat on Enterprise Holding’s three-member board, the Third Circuit focused on other key facts in support of its decision:  (i) Enterprise Holdings had no authority to hire or fire assistant managers; (ii) Enterprise Holdings had no authority to promulgate work rules or assignments; (iii) Enterprise Holdings had no authority to set compensation benefits, schedules, or rates or methods of payment; (iv) Enterprise Holdings was not involved in employee supervision or employee discipline; and (v) Enterprise Holdings did not exercise or maintain any control over employee records.  Among these factors, the Third Circuit emphasized that Enterprise Holdings only “suggested” various Human Resources and salary policies and that the adoption of such suggestions was not mandatory, rendering the parent company more akin to a third-party consultant.

In light of this decision, employers and, in particular, parent corporations, should be aware of the fact that courts within the Third Circuit (Delaware, New Jersey and Pennsylvania) will apply the “Enterprise” test going forward.  Notwithstanding, while the test has been articulated, the analysis remains highly fact intensive and courts are by no means limited to consideration of the factors identified in the Enterprise decision.  Employers unsure of their FLSA joint employer status should contact their labor and employment counsel.

The Supreme Court Rules: Pharmaceutical Representatives Qualify as Outside Salespersons

By: Helen E. Tuttle and Dennis M. Mulgrew, Jr.

The Supreme Court recently handed down a decision clarifying the contours of the “outside sales” exemption to the Fair Labor Standards Act (“FLSA”) and settled a split between the U.S. Court of Appeals for the Second and Ninth Circuits.  The Court rejected the attempt by the Department of Labor (“DOL”) to reverse the longstanding industry practice of classifying pharmaceutical sales representatives as exempt employees based on its finding that the DOL had never suggested that the industry practice was improper and had never taken legal action to stop the practice.  The Court observed that to reverse the longstanding practice in that circumstance would be an improper “unfair surprise” to the industry.

In Christopher v. SmithKline Beecham Corp., two pharmaceutical representatives claimed that their employer failed to pay them overtime wages based on an improper classification as exempt outside sales employees.  The representatives’ work consisted mainly of visiting doctors’ offices and encouraging them to prescribe SmithKline drugs.  Each week, the employees worked about 40 hours calling on physicians, and spent another 10 to 20 hours on other miscellaneous tasks.  Although the employees were well-compensated, they were not paid overtime wages for hours they worked in excess of 40 hours per week.

The Supreme Court considered whether these employees were “employed . . . in the capacity of outside salesman” and therefore exempt from overtime wages under the FLSA.  Congress did not define the term “outside salesman” but delegated that authority to the DOL by regulation.  The statute nevertheless provides that “‘sale’ or ‘sell’ includes any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.”

In reaching its decision, the Court first determined that the DOL’s interpretation of the statute was not entitled to deference because it had never been formally promulgated as a regulation.  Instead, after years of silence, the DOL presented its interpretation in amicus briefs filed in related litigation in the Second and Ninth Circuits, and then presented a completely different interpretation in its submission to the Supreme Court in the Christopher appeal.

Having determined that there was no basis to defer to the Agency’s interpretation, the Court used the traditional tools of statutory interpretation to determine whether the pharmaceutical representatives were exempt outside salespersons.  Under that analysis, the Court found that pharmaceutical representatives make sales for purposes of the FLSA, and therefore are exempt, even though they do not technically “sell” anything to the physicians they visit, because the “other disposition” catchall category in the statute’s definition of “sale” should be understood to include the sales representatives’ practice of obtaining nonbinding commitments from physicians to prescribe the employer’s drugs.  The Court was also convinced that pharmaceutical sales representatives are “outside salespersons” under the statute because they act like salespersons, are paid like salespersons, and receive training to close sales like salespersons.

A cautionary note:  this Supreme Court decision is limited to pharmaceutical industry representatives only.  While the “outside sales” exemption may continue to be litigated, this decision has provided much guidance on a previously undefined term under the FLSA.  And, of course, the decision has no impact on state wage and hour laws that do not track the FLSA.

7th Circuit Finds Pharmaceutical Sales Reps Exempt Under FLSA Administrative Exemption

In consolidated cases decided on May 9, 2012, the U.S. Court of Appeals for the Seventh Circuit (which covers employers in Illinois, Indiana and Wisconsin) held that pharmaceutical sales representatives employed by Abbott Laboratories, Inc. and Eli Lilly & Co. are exempt from overtime pay requirements under the Fair Labor Standards Act’s “administrative” exemption.  In so holding, the Seventh Circuit joins the Third Circuit, which similarly held in February 2010 that Johnson & Johnson sales representatives were covered by the administrative exemption.  On the other hand, the Second Circuit ruled in July 2010 that the administrative exemption did not apply to sales reps of Novartis Pharmaceutical Corp.
The Seventh Circuit’s ruling on the administrative exemption comes at a time when the U.S. Supreme Court has heard arguments, and expects to rule next month, in a case addressing whether the FLSA’s separate “outside sales” exemption applies to pharmaceutical sales reps employed by GlaxoSmithKline PLC.  Depending on the Supreme Court’s ruling and the particular circumstances of the employees involved, employers in the Seventh Circuit may soon have a double-barreled argument that their outside sales employees are exempt from FLSA overtime pay requirements under both the administrative and outside sales exemptions.  The consolidated Seventh Circuit cases are Schaefer-LaRose v. Eli Lilly & Co., No. 10-3855, and Jirak, et al. v. Abbott Laboratories, Inc., Nos. 11-1980 and 11-2131.