Accountants Barred From Overtime Pay By FLSA Professional Exemption, Court Rules

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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 ruled July 22.

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 Circuit said.

“[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 accountancy tasks.”

Judges Pierre N. Leval and Guido Calabresi joined in the decision.

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 be.”

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 January 2012 granted conditional 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 ruled the employees couldn't surmount the FLSA exemption for professional employees ( 921 F. Supp. 2d 26 (S.D.N.Y. 2012)).

In a related action, the Washington Court of Appeals has ruled 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. 2012)).

Other Exemptions Are Distinct

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 (a)).

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 professional.

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.

Associates Use Professional Judgment

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 said.

“[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 professional exemption.

“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.”

Guidelines, Supervision Not Disqualifying

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 said.

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 critical manner.”

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 said.

'Prolonged Course of Instruction' Required

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 requirements.”

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 it.”

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 at  

To contact the editor responsible for this story: Susan J. McGolrick at

Text of the opinion is available at

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