By Kevin McGowan
July 22 --Accountants employed as “audit associates” by
KPMG LLP aren't entitled to overtime pay under the Fair Labor
Standards Act because they fit within a statutory exemption for
“learned professionals,” the U.S. Court of the Appeals for
the Second Circuit
Affirming summary judgment for the major accounting firm, the court
said although entry-level audit associates receive internal training
from KPMG and perform many routine tasks, they satisfy the Labor
Department's criteria for the FLSA's professional exemption.
The employees are exempt professionals because they are employed in
a field of science and learning, rely on knowledge customarily
acquired through prolonged specialized instruction, and consistently
exercise professional judgment in performing their jobs, the Second
“[O]ur review of the case leads to the conclusion that
plaintiffs are, in the broad sense as well as through a fine-grained
analysis of the Department of Labor regulations, not the type of
worker that the FLSA was designed to protect,” Judge Gerard E.
Lynch wrote. “Our review has demonstrated that audit associates,
while early in their careers, are precisely the sort of professionals
the regulations seek to exempt from [the] FLSA--well-compensated
professionals at a top national accountancy practice, performing core
Judges Pierre N. Leval and Guido Calabresi joined in the
In a July 22 statement, KPMG hailed the court's recognition that
its audit associates are “learned professionals” exempt
from FLSA overtime requirements and that “our associates are
well-educated, highly trained people who should not be treated as
anything less than the professionals they both are and aspire to
The firm “works very hard to ensure our professionals
maintain an appropriate work-life balance and are compensated fairly
within an extremely competitive profession,” KPMG said.
The plaintiffs' attorneys were unavailable for comment July 22.
The U.S. District Court for the Southern District of New York in
certification of an FLSA collective action covering a nationwide class
of KPMG audit associates (
2012 BL 50557, 18 WH Cases2d 1179 (S.D.N.Y. 2012); 5 DLR A-3, 1/9/12).
More than 1,000 KPMG current and former audit associates opted in to
the FLSA overtime suit.
But the district court subsequently
the employees couldn't surmount the FLSA exemption for professional
921 F. Supp. 2d 26 (S.D.N.Y. 2012)).
In a related action, the Washington Court of Appeals has
that KPMG audit associates seeking overtime pay under state law fall
within a professional employee exemption to the Washington wage and
hour statute (Litchfield v. KPMG LLP,
285 P.3d 172, 19 WH Cases2d 1054 (Wash. Ct. App.
The FLSA professional employee exemption is codified at 29 U.S.C.
§ 213(a)(1) and Labor Department regulations implementing the
exemption provide “an employee's primary duty must be the
performance of work requiring advanced knowledge in a field of science
or learning customarily acquired by a prolonged course of specialized
intellectual instruction” (29 C.F.R. § 541.301
The court said although entry-level audit
associates receive internal training from KPMG and perform many
routine tasks, they satisfy the Labor Department's criteria for the
FLSA's professional exemption.
The parties in the KPMG case didn't dispute that accountancy is a
“field of science or learning” and the DOL regulations
include accountants as an example of potentially exempt professionals,
the court said.
But the KPMG employees argued that the firm can't prove as a matter
of law that audit associates exercise the judgment and discretion of
professional employees or that their routine jobs require
“learning customarily required by a prolonged course” of
“specialized intellectual instruction.”
The court said the “independent judgment” referred to
in the FLSA's administrative and executive exemptions is distinct from
the discretion and judgment an employee must exercise to be an exempt
Unlike those qualified for the administrative exemption, the court
said, “learned professionals, particularly those working for
firms that provide professional services to other businesses, need not
exercise management authority to operate as professionals; what
matters is whether they exercise intellectual judgment within the
domain of their particular expertise.”
The Labor Department “has recognized that the discretion and
judgment standard for the professional exemption is 'less stringent'
than the discretion and independent judgment standard of the
administrative exemption,” the court said, citing the preamble
to the DOL's 2004 final rule on the white-collar exemptions (69 Fed.
Reg. 22,122) (76 DLR AA-1, 4/21/04).
“Thus, while the administrative exemption may provide helpful
guidance in identifying some of the characteristics of professional
discretion and judgment, we decline to apply the administrative
exemption standard uncritically to the learned profession
exemption,” the court said.
As for the professional exemption's advanced knowledge requirement,
the Second Circuit said its “review of the most analogous cases
suggests that workers apply discretion when they interpret and analyze
information central to the practice of the profession.”
That audit associates “spend some time performing 'clerical
and administrative' tasks does not in itself defeat their
classification as learned professionals,” the court said.
“Similarly, workers may be found to exercise professional
judgment even when their discretion in performing their duties is
constrained by formal guidelines, or when ultimate judgment is
deferred to higher authorities.”
“[U]nlike the administrative exemption, where the exercise of
discretion requires engagement with 'management policies or operating
practices,' or other conduct typical of business management, the
professional exemption requires the exercise of judgment
characteristic of the learned profession at issue,” the court
“[W]e take from our sister circuits' decisions the sensible
proposition that the learned professions exemption applies if workers
rely on advanced knowledge of their specialty to exercise discretion
and judgment that is characteristic of their field of intellectual
endeavor,” Lynch wrote.
The KPMG employees argued that the audit associates' tasks don't
require the requisite judgment and discretion to fall within the FLSA
“To support that argument, plaintiffs cite two attributes of
audit associates' actual employment: that most of their work is
routine, with heavy dependence on guidelines and templates, and that
there is pervasive supervision culminating in the extensive review of
any work product,” the court said.
The actual steps audit associates perform--which involve filling
out template forms, obtaining client documentation and interviewing
clients regarding those documents, and documenting their
activities--“are not sufficiently intellectual in character to
reflect the exercise of discretion,” the employees argued.
But the court said neither the associates' junior status nor the
KPMG instructions they must follow means they aren't professionals
under the FLSA.
“It does not follow, however, that because [audit associates]
are the most junior members of the team, they fail to rely on an
advanced knowledge of accountancy,” Lynch wrote. “Indeed,
the facts presented by the plaintiffs indicate a role for audit
associates that undermines the plaintiffs' trivializing
characterization of their work.”
That audit associates' tasks “can be broken down into
component parts” and that KPMG's junior accountants are given
step-by-step instructions for performing their functions effectively
“does not mean that in performing these tasks audit associates
do not demonstrate the professional skepticism and trained intellect
that is characteristic of professional accountants,” the court
The plaintiffs' “fundamental error is to confuse being an
entry-level member of a profession with not being a professional at
all,” the court said. “Audit associates are the most
junior members of the team, and it is hardly surprising that they do
not make high-level decisions central to KPMG's business.”
But unlike the FLSA's administrative and executive exemptions,
“the learned profession exemption does not require that the
professional reach conclusions that guide or alter the conduct of the
business,” the court said.
“The critical question is whether the workers act in a manner
that reflects knowledge and requires judgments characteristic of a
worker practicing that particular profession,” the court said.
“Here, by testing controls, performing inventory reviews, and
ultimately replicating the audit process in each work paper, audit
associates clearly did so by engaging with the audit process in a
That more senior employees closely supervise the audit associates
also doesn't make them nonexempt under the FLSA, the court said.
“Such supervision ensures quality work for clients and
provides training and feedback to the less experienced professionals,
and does not relegate the junior professionals to the role or status
of non-professional staff,” the court said. “Even by the
plaintiffs' own description, supervision does not deprive audit
associates of the need to assiduously and consistently apply the
skepticism characteristic of the accounting profession.”
Labor Department regulations distinguish between employees who
“perform similar job duties” to those of certified public
accountants, who may qualify as learned professionals, and mere
“accounting clerks, bookkeepers, and other employees who
normally perform a great deal of routine work,” who generally
won't qualify as professionals, the court said.
“We have little difficulty finding that audit associates fall
within the former category,” the court
To fit within the exemption, the employees also must use advanced
knowledge of accounting that is “customarily acquired by a
prolonged course of specialized intellectual instruction,” the
court said, citing 29 C.F.R. § 541.301(b).
The employees said that while the core accounting education audit
associates receive before joining KPMG “might be helpful,”
the skills needed to perform the job actually are learned through
KPMG's initial training and on-the-job instruction.
The “treatment of the education requirement by other
circuits--which we find persuasive--indicates that the requirement
will usually be satisfied by a few years of relevant, specialized
training, and suggests that a bachelor's degree in a germane field
suffices,” the court said. “In contrast, the requirement
will not be satisfied by generic, non-specialized educational
The employees admitted KPMG requires audit associates to be
eligible or nearly eligible to become licensed certified public
accountants and that “the vast majority” of audit
associates had accounting degrees and were eligible to take the CPA
exam, the court said.
Of 1,096 audit associates who opted into the FLSA collective
action, 82 percent have either graduate or undergraduate degrees in
accounting and an additional 14 percent had degrees in related fields
making them CPA-eligible, the court said. The remaining 4 percent of
opt-in plaintiffs had a minor or certificate in accounting and of
three opt-in plaintiffs who did not, one was already a licensed CPA,
the court said.
“In light of their formidable educational qualifications, it
is indisputable that the vast majority of audit associates received
such an education, and we reject plaintiffs' argument that KPMG's
willingness to hire 'even one audit associate who did not have an
accounting degree' creates a material fact issue regarding whether
audit associates 'required advanced accounting
knowledge,' ” the court said.
“We thus conclude that the audit associates receive the
training necessary to work as accountants through a prolonged course
of specialized instruction, and thus satisfy the final element of the
learned professional test,” the court said. “We need not
determine the minimum amount of education necessary to satisfy this
requirement; we hold only that KPMG audit associates clearly satisfied
Justin M. Swartz, Rachel M. Bien and Deirdre A. Aaron of Outten
& Golden in New York represented the employees. Carter G.
Phillips, Michael C. Kelley, Jennifer A. Landau, Eric D. MacArthur and
Eamon P. Joyce of Sidley Austin in Washington represented KPMG.
To contact the reporter on this story: Kevin McGowan in Washington
To contact the editor responsible for this story: Susan J.
Text of the opinion is available at
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