Vedder Thinking | Articles New York Federal Court Holds That Audit Professionals Are Exempt under the Fair Labor Standards Act
Whether an accounting firm's professional staff is properly classified as exempt (i.e., not entitled to time-and-a-half overtime payment for work in excess of 40 hours in a week) or non-exempt (i.e., entitled to time-and-a-half overtime pay) under the federal Fair Labor Standards Act (FLSA) is of considerable importance to the profession. In a decision on November 30, 2012 in the case of Pippins v. KPMG, Judge Colleen McMahon of the U.S. Federal District Court for the Southern District of New York granted KPMG's motion for summary judgment, holding that the firm's Audit Associates are exempt as "learned professionals" under the FLSA.
The plaintiffs, former Audit Associates at KPMG, brought an action against KPMG under the FLSA and the New York Labor Law for allegedly failing to compensate them for time worked in excess of 40 hours in a week.
KPMG Audit Associates in the suit were the junior-level team members in an audit engagement. While not all KPMG Audit Associates were required to be licensed Certified Public Accountants, KPMG did require all Audit Associates to have a bachelor's degree with a major in accounting, finance, or business management/administration. Additionally, KMPG typically required that its Audit Associates be "CPA" ready, i.e., eligible to sit for the CPA exam.
Audit Associates' duties include performing various audit procedures and summarizing the results in audit work papers. The court found such duties to include:
- Testing internal controls over financial reporting
- Conducting "walkthroughs" (interviews of client representatives)
- Auditing inventory
- Conducting substantive analytical procedures
- Preparing audit work papers
- Updating work papers from prior years
- Conducting research and consultation
- Preparing confirmations and reconciliations
- Doing certain clerical tasks (making copies, sending faxes, etc.)
As with other members of the audit team, the work produced by Audit Associates was required to have been conducted in accordance with professional standards and KPMG's operating standards, and the team's work papers were subject to GAAS and PCAOB documentation requirements. KPMG's procedures included the use of computer software, which guided the user through various audit steps and prompted the user to complete certain tasks or answer certain questions. The parties disputed the implications of the use of these software programs and guidelines. Plaintiffs asserted that by following these guidelines and using such programs the Audit Associates' duties were "rote" or routine.
To satisfy the requirements of the "learned professional" exemption (in addition to a modest salary requirement ($455.00 per week) which KPMG's Audit Associates easily met), the employee's primary duties "must be the performance of (1) work requiring advanced knowledge (2) in a field of science or learning (3) that is customarily acquired by a prolonged course of specialized intellectual instruction." Since specialized academic training is necessary to satisfy the exemption, Judge McMahon noted that the vast majority of the Audit Associates held Bachelor's degrees in accounting or a related field.
In addition, KPMG customarily requires associates to have the same or almost the same educational background as fully licensed CPAs—and the court pointed out that CPAs are considered to be "learned professionals" under the regulations. Judge McMahon rejected plaintiffs’ argument that KMPG failed to meet the advanced learning requirement because not all Audit Associates were CPA-eligible and because they (according to the plaintiffs) learn everything they need to perform audit work through on-the-job training. The court found that as a matter of policy KPMG hired persons who are or would soon be eligible to sit for the CPA exam and that all the plaintiffs had met KPMG's stringent educational requirements.
The court then analyzed whether Audit Associates' principal duties involved work requiring "advanced knowledge," meaning work that is predominantly intellectual in character and requires the consistent exercise of discretion and judgment. The court noted that Audit Associates, like other young professionals in law or medicine, are required to perform some mundane tasks in the course of their professional work; however, the record did not reflect that these tasks represented a bulk (or over 50 percent) of the Audit Associates' time. Rather, the Audit Associates' primary duties consisted of tasks related to the completion of an audit. Plaintiffs argued that those tasks are "dictated by rules and templates," and, therefore, did not require the requisite exercise of discretion and independent judgment to satisfy the learned professional exemption. The court disagreed.
As to whether the Audit Associates exercised discretion and judgment, Judge McMahon found that employees may exercise discretion and independent judgment even if their decisions or recommendations are reviewed at a higher level. The court also pointed out that the "consistent exercise of discretion and judgment" standard under the learned professional exemption is less stringent than the analogous standard for the "administrative exemption," another of the FLSA's "white-collar" exemptions.
The court found it significant that Audit Associates frequently conducted interviews of clients and were responsible for performing much of the fieldwork on site at the client's location. They were required to perform their tasks with professional skepticism, looking for evidence of a client's fraud, manipulation or deviation from financial reporting standards. The court also noted that in performing "walkthroughs" and client interviews, Audit Associates were not given a script and were expected to exercise judgment in modifying questions or following up on inconsistencies or missing information. Audit Associates must also follow up on any discrepancies they noticed during inventory observations. Accordingly, the court found that a significant portion of Audit Associates' tasks required discretion and independent judgment, typically associated with a professional. Such discretion and judgment, was not compromised by the fact that these employees followed guidelines and audit procedures outlined in KPMG manuals, were supervised by senior team members, had their work reviewed by multiple layers of experienced auditors, and adhered to GAAP and GAAS in performing their duties.
Judge McMahon concluded the decision as follows:
Audit Associates are not bookkeepers or clerks and they should not be treated as anything less than the professionals they both are and aspire to be. They are well-educated and they are well-compensated. They are not the sort of employees the FLSA was intended to protect. As learned professionals, they are exempt from the overtime requirements of the FLSA.1
As expected, the plaintiffs have appealed Judge McMahon's decision to the Court of Appeals for the Second Circuit. Until all appeals are resolved, it is premature to conclude that Judge McMahon's view of the exempt status of junior-level audit professionals is the definitive word on the subject. However, it is a notable step toward beginning to clarify this aspect of wage and hour law in the profession.
1 The Court did not rule on whether plaintiffs were exempt under the New York Labor Law.