Factors Contributing to the Overtime Pay Dilemma
The seasonal nature of the work performed by many CPA firms contributes greatly to the overtime issue. Many clients are calendar year-end entities with regulatory filing dates that compress the work timeframe. Tax filing deadlines offer little year-end flexibility, while SEC reporting clients have no such flexibility. Public accounting’s culture must meet clients’ demands during a “busy season” that typically requires both hourly and staff accountants to work over 40 hours per week.
Accountants passing the CPA exam and completing other licensing requirements support their professional and exempt manager status, which the courts view as an important factor in this matter. Other staff more closely resemble provisional employees who do less important work and will be less trusted to operate autonomously, rendering them more likely to be viewed as managed employees, rather than managers themselves. To the extent that the time of unlicensed employees is leveraged in engagements, mandatory overtime obligations are a more plausible conclusion.
The essence of professionals making decisions cannot be precisely defined. Exercising professional judgment need not constitute a primary job duty. The mere noting and reporting of irregularities or errors in the process of tabulation, however, might not exempt someone from overtime. Rather than exercise any discretion, those who simply perform the audit steps that are assigned to them might not be considered exempt. On the other hand, accounting tasks can be broken down into component parts and staff receive step-by-step instructions to perform their functions effectively. This precise delineation does not imply that employees perform their tasks with adequate professional skepticism and judgment. Their primary duty must be to deploy the skepticism necessary to ensure the integrity of the auditing process at hand.
Legal and Operational Issues
While Fair Labor Standards Act (FLSA) overtime rules generally have considered professional employees exempt, their distinction from nonexempt employees is difficult to apply in a changing service economy and the professionalization of many occupations. CPA firms should quantitatively assess how much to pay employees upon qualitatively analyzing their responsibilities. Many public accounting firms continue to view the overtime question as professional accountants are “managers” due to their annual salaries, which are at a level that the FLSA classified as exempt. In Pippins v. KPMG [LLP, No. 13-889 (2d Cir. 2014)], the Second Circuit strongly endorsed exempt status for all staff accountants. This holding differs from Campbell v. PricewaterhouseCoopers [642 F. 3d 820 (9th Cir. 2011)], where the Ninth Circuit found accountants are not always exempt from earning overtime pay. This conflict across the federal courts invites some future potential Supreme Court resolution to resolve this issue.
Should Public Accounting Firms Pay Overtime?
For several decades, public accounting paid no overtime to employees whose workweeks exceeded 40 hours. Paying overtime to younger professional employees adds payroll costs that clients are unlikely to cover. While in the past, an abundant supply of new hires let public accounting firms pay no overtime without staffing consequences, the current “pipeline” problems have now impaired this process. Finding and retaining reliable staff requires a new approach—perhaps through changes in compensation.
Accounting had for many years offered a starting salary premium to college students to attract the “best and brightest.” But accounting starting salaries have stagnated compared to competing fields, and students realize this. The prospects of overtime might ease the starting pay disadvantage that new hires now experience.
Public accounting careers had offered potential equity participation to help justify short-term sacrifice. But younger generations often assume that they live in a “gig economy,” where long term career planning is less possible. Overtime compensation provides an immediate return for efforts beyond normal expectations, and this may be more important to today’s staff.
Public accounting’s work expectations created a stress test that firms could use to identify employees who were most worthy of promotion. Paying overtime would not distort this critical signalling mechanism. Ambitious and energetic staff would accept the overtime and still go the extra mile. Others will often likely turn down the chance to earn more. Employers should thus reward employees who “step up” and accept these overtime challenges.
Some believe that compensatory time that staff can use after the completion of busy season effectively offsets the need for overtime pay. Staff no doubt appreciate the ability to occasionally work less than 40 hours to recognize the extra hours they devoted to work at other times. Anecdotal evidence gathered by the authors suggests that comp time never truly balances the time ledger. Even if it did, the virtually compulsive nature of the extra work during busy season tends to be coercive. Moreover, some firms act as if comp time is a gift bestowed rather than a right that was earned. As another alternative, CPA firms could pay busy season bonuses based upon such factors as time worked, firm profits, and the current job market.
Nature of Supervisory Work in Public Accounting Firms
As part of the cost-benefit analysis on paying overtime, CPA firms should consider that the implications of full-time staff working excessive un-directly compensated hours. Firms with many non-CPA accountants could highlight the differences between the work performed by certified and non-certified accountants. Firms that demand rapid certification should significantly elevate their newly licensed CPAs’ responsibilities and autonomy. Firms giving staff substantial unsupervised tasks can better avoid some overtime liability, but risk malpractice liability. In summary, the essence of a professional, and accordingly an exempt employee, is the exercise of discretion and informed judgment.
A CPA firm whose work programs and tax compliance procedures contain highly rigid checklists of steps that leave the staff accountant little leeway to complete the engagement could pose a problem if a court later concludes that the work is excessively mechanical. Allowing staff to alter parts of the risk-based work program after appropriate research and consultation tends to support FLSA classification guidelines, but again risk malpractice suits if the services are deemed insufficient or ineffective.
To help buttress their exempt classification during busy season, firms’ staff could supervise more of the work that interns normally do, giving them additional supervisory opportunities and perhaps reducing interns’ overtime by making them more efficient. But such practices could impact CPA firms’ recruiting efforts. Students generally prefer paid overtime internships, and they are often encouraged to work as much as possible during their internships to better grasp the nature of their possible future roles. Yet, delegating an intern’s work to a junior staff member could leave the interns with inadequate tasks to keep them intellectually stimulated and inhibit them from exerting their maximum effort. This domino effect may impair the firm’s recruiting efforts and chances to convert them to full-time staff in the future, as a dissatisfied intern might not want to return to the firm.
The Bigger Picture
Firms’ overtime compensation policies should form part of their broader effort to minimize employee turnover, recruit future professionals, and develop professional careers. Those taking the initiative and leadership should end up ahead of the market.
