The exempt status of an accounting firm's audit associates as "learned professionals" under the federal Fair Labor Standards Act (FLSA) was recently affirmed by the United States Court of Appeals for the Second Circuit in Pippins v. KPMG, LLP, 2104 WL 3583899 (2d Cir. 2014) (i.e., that such audit associates are not entitled to time-and-a-half overtime payment for work in excess of 40 hours in a week).
The plaintiffs-appellants, former junior-level 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. In the decision below, Pippins v. KPMG, LLC, 921 F. Supp. 2d 26 (S.D.N.Y. 2012), Judge Colleen McMahon of the federal district court for the Southern District of New York granted KPMG's motion for summary judgment, holding that KPMG's Audit Associates are exempt as "learned professionals" under the FLSA. Plaintiffs appealed, and the Second Circuit affirmed the lower court's decision.
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 (1) predominantly intellectual in character and . . . require the consistent exercise of discretion and judgment [i.e., "advanced knowledge"], (2) in a field of science or learning, which includes accounting and (3) of a type where specialized academic training is a standard prerequisite for entrance into the profession." Only prongs 1 and 3 were in dispute, as there was no dispute that the Audit Associates are accountants.
In a case of first impression for the Second Circuit, the court found that "advanced knowledge" required the "exercise [of] intellectual judgment within the domain of the[ ] particular [professional] expertise." Thus, the first prong is satisfied "if workers rely on advanced knowledge of their specialty to exercise discretion and judgment that is characteristic of their field of intellectual endeavor."
For the profession of accounting, the court found such advanced knowledge deeply rooted in the profession's "application of appropriate professional skepticism . . . an attitude that includes a questioning mind and a critical assessment of audit evidence and requires an ongoing questioning of whether the information and evidence obtained suggests that a material misstatement due to fraud has occurred."
Rejecting the plaintiffs' effort to trivialize the work and work-product of the Audit Associates, the appeals court unequivocally held that Audit Associates, despite the sometimes routine nature of their work, practiced the necessary professional skepticism by bringing a "questioning mind to the performance of their duties," which is central to the execution of the audit. The court found the Audit Associates' professional judgment crucial in the performance of core accounting tasks, including analyzing information, interviewing the client, testing controls, performing inventory reviews and producing written work.
The court found irrelevant the plaintiffs' argument that the Audit Associates' work was routine with heavy dependence on guidelines and templates or was supervised by more senior auditors, as neither impacts the professional judgments that the Audit Associates must make in the performance of their work. Indeed, the Second Circuit cautioned that one should not "confuse being an entry-level member of a profession with not being a professional at all."
The court also found that the Audit Associates practiced the necessary professional skepticism and deployed advanced knowledge in the performance of their specific job tasks precisely because they were required "to identify the unique circumstances that necessitate seeking further advice." The "identification of errors or anomalies during the audit process itself is an exercise of accounting knowledge and professional judgment that a non-accountant would not possess. It is a hallmark of informed professional judgment to understand when a problem can be dealt with by the professional herself, and when the issue needs to be brought to the attention of a senior colleague with greater experience, wisdom, or authority."
As to the third prong (the education component), the court found critical that the "vast majority of Audit Associates had accounting degrees and were eligible to take the CPA Exam." The court did not find persuasive the plaintiffs' argument that Audit Associates did not have the necessary previous intellectual instruction because the "Audit Associates gain the necessary knowledge to act as accountants through a one-week introductory training course, followed by on-the-job training." The court found that "the average classics or biochemistry major could not understand the materials, or develop the requisite understanding of the audit function on the basis of a brief training period."
In concluding its opinion and finding that "Audit Associates are learned professionals who perform work requiring advanced knowledge requiring the consistent exercise of discretion and judgment, and who have customarily received this advanced knowledge through a prolonged course of specialized intellectual instruction," the Second Circuit stated:
[t]he FLSA is properly considered a shield to protect unwary workers; it is not a sword by which [professionals] at the pinnacle of accomplishment and prestige in [their profession] may obtain a benefit from their employer for which they did not bargain. . . . [W]e think that the DOL interpretative guidelines should be read in an effort to promote the FLSA's purpose, not to frustrate it. Our review has demonstrated that Audit Associates, while early in their careers, are precisely the types of professionals the regulations seek to exempt from FLSA — well-compensated professionals at a top national accountancy practice, performing core accountancy tasks.
This case helps clarify wage and hour law in the accounting profession by establishing that junior-level audit professionals are exempt from the FLSA as "learned professionals" and thus, are not entitled to time-and-a-half overtime payment for work in excess of 40 hours in a week.