Accounting professionals are keenly aware that the workflow in public accounting is cyclical and that reporting deadlines can lead to work weeks well in excess of 40 hours. CPA firms and professional organizations are aware of the overtime issue and its potential impact on recruiting and retention. Accordingly, helping employees balance the demands of their professional and personal lives is a topic of interest. Firms’ web sites describe programs designed to increase employee satisfaction, journal articles offer strategies for improving work/life balance, and the AICPA Work/Life and Women’s Initiatives Executive Committee provides an employee retention guide that offers strategies for retaining top talent (“Employee Retention Guide: How to Keep Your Top Talent on Board,” http://www.aicpa.org/Career/WomenintheProfession/DownloadableDocuments/2945378_EmployeeRetentionGuide.pdf).
Nonetheless, extremely long workweeks remain the norm for many public accounting employees when deadlines approach. A 2004 AICPA report based on exit interview data provided by CPA firms identifies “desire for change” and “work/life balance issues” as the most frequently cited reasons for turnover (“AICPA Work/Life and Women’s Initiatives, 2004 Research: A Decade of Changes in The Accounting Profession: Workforce Trends and Human Capital Practices,” http://www.aicpa.org/career/worklifebalance/downloadabledocuments/researchpaper_v5.pdf, page 25). Some former employees of the Big Four and other large accounting firms have initiated class action lawsuits seeking compensation for overtime. Although this type of litigation can drag on for years, cases are beginning to work their way through the legal system.
The objectives of this article are threefold. First, the authors explain the requirements of the Fair Labor Standards Act (FLSA), which governs who is eligible to receive overtime pay. This is followed by a review of selected cases and the arguments on both sides of the overtime pay issue. The conclusion describes recent developments in the area and considers possible outcomes and alternatives.
What Does the FLSA Require?
Eligibility for overtime pay is only one of the matters governed by the FLSA. The FLSA was enacted in 1938 and initially mandated a maximum 45-hour workweek with time-and-a-half pay for overtime. The act established a minimum wage system and regulated child labor. The FLSA also specifies who is entitled to receive overtime pay.
Although many people think of jobs as either “salaried” or “hourly,” the FLSA categorizes workers as either “exempt” or “nonexempt.” Exempt employees are viewed as higher status employees who—
- are paid a set salary together with additional benefits,
- do not punch a time clock,
- are members of management or licensed professionals,
- receive the same compensation regardless of the number of hours worked, and
- are not eligible for overtime pay.
Nonexempt employees, who are generally paid on an hourly basis, are eligible for overtime pay when their work exceeds 40 hours in any week. Overtime hours are paid at 1.5 times the employee’s regularly hourly rate. For many nonexempt employees, overtime pay represents an opportunity to significantly increase their compensation and is viewed as an important benefit that offsets the hardship of excess work hours.
Cost-conscious employers have incentives to avoid paying overtime compensation and often strive to create employee schedules that avoid or minimize overtime hours. An alternative strategy to avoid paying overtime compensation is to classify employees as exempt. In order to do so, an employer must satisfy the three specific guidelines set out in the FLSA. An exempt employee must—
- be paid more than $23,600 per year,
- be paid on a salary basis, and
- perform “exempt” job duties.
The first two requirements are straight-forward. Disagreements about employees’ rights to receive overtime pay generally center around which types of job duties qualify as exempt.
The FLSA describes three categories of exempt job duties: executive, professional, and administrative. Exempt executive workers supervise two or more workers, engage in management functions, and make hiring, firing, and promotion types of decisions. Exempt professional job duties cover the traditional learned professions, such as lawyers, doctors, dentists, teachers, architects, accountants, and engineers. Professional work involves specialized education and the exercise of discretion in the field of endeavor. Experienced accountants at higher levels of an organization clearly fit into this category.
To qualify for the third category, exempt administrative, an employee’s primary duties must entail the performance of nonmanual work that directly relates to management and must include the exercise of discretion and independent judgment. The current legal debate centers primarily on whether work performed by entry-level and lower-level employees in accounting firms falls into this category. Accounting firms have taken the position that staff accountants are professionals who constantly use discretion and independent judgment. Class action lawyers argue that staff accountants perform routine mechanical tasks that do not involve discretion or independent judgment.
Class action lawyers argue that staff accountants perform routine mechanical tasks that do not involve discretion or independent judgment.
The outcomes of such lawsuits will determine whether former employees are entitled to potentially thousands of dollars of compensation each, whether large accounting firms are required to pay potentially millions of dollars in back overtime pay, and whether the traditional compensation model for lower-level employees will persist or be substantially altered.
Overview of Class Action Lawsuits
Class action lawsuits have been filed against several large accounting firms on behalf of staff accountants who have not received overtime pay even though these workers have typically worked far in excess of 40 hours per week. These class actions represent a large number of plaintiffs who are in the same situation. The Exhibit provides an overview of class actions against the Big Four CPA firms in the United States.
Litigation for Failure to Pay Overtime to Staff Accountants
A closer look at the facts in the now settled case of Campbell v. Pricewater-house Coopers [759 F.3d 235 (2014)] can help clarify the issues faced by the legal system. This lawsuit was commenced on behalf of approximately 2,000 unlicensed accountants seeking overtime pay. Jason Campbell (the named plaintiff) was a non-CPA accountant who worked for Pricewater-houseCoopers in the audit field. Campbell claimed that the work he did was routine and menial. Campbell argued that “strict instructions, comprehensive computer auditing software, and an extensive work-review system all preclude them from exercising any significant degree of discretionary judgment or analytical thinking.” A U.S. District Court in California initially awarded a judgment for the employees holding that the staff accountants were entitled to overtime pay, and Pricewater house-Coopers successfully appealed the decision and extended the case’s litigation.
The trial court noted that Campbell received a “less than expected” rating during an annual review and was terminated for poor performance in 2006. The U.S. Court of Appeals stated (642 F.3d 820, 823):
PwC, on the other hand, argues Plaintiffs perform analytical work “integral” to PwC’s Attest services. To the extent Plaintiffs do not regularly exercise discretion and independent judgment during an audit engagement, PwC says they are failing to meet the firm’s expectations. PwC emphasizes the variety of duties performed by Plaintiffs during an engagement and claims the failure to perform those tasks adequately can have “significant consequences” for PwC’s clients.
After eight years of legal wrangling, PwC recently settled this dispute as noted in the attached Exhibit. Several other disputes are continuing to work their way through the legal system.
The Case for Overtime Pay for Staff Accountants
Proponents of classifying lower-level accountants as nonexempt workers, eligible for overtime pay, offer several arguments. First, they assert, new accountants are generally engaged in routine tasks that do not involve the exercise of independent judgment or discretion. Second, lower-level accountants generate routine work product that is then passed on to more experienced accountants who use judgment and discretion about what to do with the information assembled by staff accountants. Third, the rigid rules for audit examination take discretion away from staff accountants and reduce the work to a clerical function.
Those advocating overtime pay also point out that entry-level staff accountants frequently work side by side with intern candidates who have not yet completed the graduate studies typically required to be licensed as a CPA. The intern candidates, they contend, perform the same tasks as entry-level staff accountants that are paid overtime. In some cases, accounting interns make more money than salaried staff accountants because of the ability to receive overtime pay. The argument that interns perform the same tasks as entry-level accountants poses an interesting challenge for accounting firms who resist paying overtime to lower-level staff accountants.
It should be noted that there have been a series of unsuccessful lawsuits by entry-level lawyers claiming that the lawyers should receive overtime pay as nonexempt workers. The courts have held that lawyers are professionals, and they also engage in exempt professional duties and are therefore exempt salaried employees. Staff accountants seeking overtime pay can argue that lawyers are distinguishable from accountants because staff accountants perform repetitive tasks that are different from those typically performed by lawyers.
The Case against Overtime Pay for Staff Accountants
Despite the arguments for paying overtime, professional service firms have made strong counterarguments that are gaining traction in legal proceedings. Chief among these is that accountants (even at the entry level) are engaged in a learned profession that requires specialized education and expertise. Accountants are professionals who have, for decades, been treated as salaried professionals just like doctors, lawyers, and engineers. Moreover, firms argue that staff accountants perform a crucial, first-line role in the audit process.
The authoritative auditing literature published by the AICPA supports this line of reasoning. For example, AU-C section 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards,” describes the independent auditor’s responsibilities, including the responsibility to act with professional skepticism and to exercise professional judgment. The definition of “auditor” provided in paragraph 14 includes both the engagement partner and other members of the engagement team. The definitions of professional judgment and professional skepticism provide insight into the knowledge, skills, and attitudes expected of audit team members:
- Professional judgment. The application of relevant training, knowledge, and experience, within the context provided by auditing, and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement.
- Professional skepticism. An attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence (http://www.aicpa.org/research/standards/auditattest/downloadabledocuments/au-c00200.pdf).
Paragraph A22 explains that professional skepticism includes being alert to contradictory audit evidence, information that calls into question the reliability of documents and responses to inquiries, conditions indicating possible fraud, and situations that may indicate the need for additional audit procedures. In paragraph A23, the standard makes clear that maintaining professional skepticism reduces the risk of overlooking unusual circumstances, drawing unwarranted conclusions, and making inappropriate assumptions about the nature, timing and extent of audit procedures needed. These responsibilities are shared by auditors at all levels of the engagement team (http://www.aicpa.org/research/standards/auditattest/downloadabledocuments/au-c-00200.pdf).
Accounting firms often maintain that treating staff accountants as hourly workers is demeaning and relegates these professionals to a clerical role.
AU-C section 220, “Quality Control for an Engagement Conducted in Accordance with Generally Accepted Auditing Standards,” requires audit firms to have a quality control system that ensures compliance with professional standards by firm personnel. The standard specifically charges the engagement partner with ensuring that engagement team members have the appropriate competence and capabilities to comply with professional standards (AU-C Section 220, paragraph 16, http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-C-00220.pdf). The bottom line is that the AICPA expects all members of the audit team—from interns to partners—to comply with professional auditing standards.
Overtime pay proponents also point out that interns are paid overtime while working side by side with staff accountants and performing similar work. Accounting firms respond that staff accountants have significantly more formal education and firm training than interns. Thus, staff members require less supervision and are often charged with guiding and supervising interns. The supervisory role means that staff accountants must exercise more professional judgment. These differences, firms contend, make it appropriate for staff accountants to be treated as exempt salaried professionals while interns receive overtime pay.
Two final, more practical, arguments bolster the case against overtime pay for staff accountants. First, accounting firms often maintain that treating staff accountants as hourly workers is demeaning and relegates these professionals to a clerical role inconsistent with the professional status normally associated with their education. Second, imposing a requirement to pay overtime compensation could severely strain the business model in professional service firms, leading to unintended consequences for auditors and their clients.
Potential Fallout of Paying Staff Accountants Overtime
The business model for audit services is widely understood to involve competitive bidding for fixed-price contracts. One key input to firms’ internal cost projections is the number of hours of staff time required to complete the audit. Predicting the economic effects of a sea change in compensation practices is beyond the scope of this article—and would likely only be possible by making important assumptions about the economic relationships among firms, employees, and clients. Nevertheless, several outcomes seem possible.
For example, firms might be able to pass additional compensation costs on to audit clients in the form of increased audit fees. Whether such a fee increase would be absorbed by clients (and their shareholders) or ultimately borne by consumers is unclear. Alternatively, the competitive nature of the audit market might force firms to absorb the additional costs of overtime pay for staff accountants. Again, depending upon the relative economic power of the parties involved, the financial cost might fall on the firm owners (partners) in the form of reduced profits.
Because professional service firms possess detailed data on hours worked, they might choose to implement a pay plan that effectively maintains the status quo by offering a lower base salary with overtime pay to bring employees to a market level of compensation. Forcing firms to compensate employees for overtime would also increase incentives to explore alternative means of delivering audit services. Increasing reliance on technology seems one likely avenue. Expanding reliance on paraprofessionals, nonaccounting graduates, and overseas employees are also possibilities.
It should be noted that, although these class actions lawsuits have been commenced on behalf of staff accountants in the audit function, overtime issues might also be relevant to employees working in tax and advisory services. Whatever the outcomes, altering the compensation of staff accountants to include overtime pay would undoubtedly present a major challenge to firms seeking to protect service quality while maintaining profitability.
Where Do Matters Stand?
Whether staff accountants are entitled to overtime pay remains an open question. CPA firm defendants have prevailed in several instances, suggesting that the remedy sought by accounting employees burdened with long hours may not be provided by the court system. Ernst & Young has successfully argued in two cases that an arbitration clause in its employment agreement precludes employees from bringing a class action lawsuit against the firm.
The decision in Pippins v. KPMG [759 F.3d 235 (2d Cir. 2014)] represents an important win for firms resisting mandatory overtime pay for staff accountants. In this case, the accounting firm argued that staff accountants are part of a learned profession that goes through specialized training and that staff accountants exercise discretion and judgment while on the job. The plaintiffs maintained that, although accounting is a learned profession, staff accountants do not exercise sufficient judgment and discretion to be classified as exempt employees. Staff accountants, the plaintiffs contend, actually receive most of their training after joining the firm.
KPMG filed a motion for summary judgment and succeeded in having the case dismissed by the trial court judge in 2012. The plaintiffs appealed, and, in an important decision earlier this year, the U.S. Court of Appeals for the Second Circuit upheld the dismissal of the lawsuit. This decision is binding only in three states—Connecticut, New York, and Vermont—but it has the potential to influence the outcomes of other pending cases.
No one disputes that new accountants are working extremely long hours. The short-term reward for putting in long hours without extra pay is a favorable review, which can lead to promotions and salary increases. The long-term reward is, of course, to break into the more lucrative ranks of the firm, including admission to the partnership. Clearly, some employees do not view these opportunities as adequate compensation for extremely long workweeks.
Attempts to seek compensation through class action lawsuits do not seem to be prevailing on the basis that staff accountant duties are free from discretion and routine in nature. If firms continue to prevail in these class actions, it seems unlikely that they will be forced to reevaluate their compensation plans and staffing model. The more interesting question may be whether the demands of the marketplace for talent encourage CPA firms to update work practices and compensation plans. Both firm leaders and those just beginning their accounting careers should stay tuned for further developments.