Court: Court of Appeals for the Second Circuit; July 22, 2014; Federal Appellate Court
The Fair Labor Standards Act (FLSA) mandates that employers pay overtime to employees working over forty hours per week, but exempts those employed in a "bona fide professional capacity." To qualify for the "learned professionals" exemption, an employee's primary duty must involve advanced knowledge in a field acquired through prolonged specialized education. This case evaluates whether junior accountants at KPMG, who have received specialized education, perform entry-level tasks, and are automatically promoted after two years, qualify for this exemption.
The plaintiffs, former Audit Associates at KPMG, claimed they worked over forty hours weekly without overtime pay. KPMG argued they were exempt as accountants, a recognized profession under the regulations. The District Court concluded that the plaintiffs' work involved advanced knowledge and professional judgment, granting KPMG summary judgment and denying the plaintiffs' motion for partial summary judgment.
Upon appeal, the court affirmed the District Court's ruling, emphasizing that the FLSA's professional exemption requires meeting a three-pronged test: (1) work must be predominantly intellectual requiring discretion and judgment; (2) it must be in a field of science or learning; and (3) specialized academic training must be a standard prerequisite. All three criteria must be satisfied for the exemption to apply, and any FLSA exemptions are to be interpreted narrowly against employers.
Certified public accountants typically satisfy the learned professional exemption under FLSA regulations; however, other accountants performing similar duties may also qualify, while routine roles like accounting clerks and bookkeepers do not. Plaintiffs acknowledge their work is in accounting but argue they do not meet all exemption criteria, particularly that their roles do not require specialized training or advanced knowledge. They assert that Audit Associates receive necessary training post-hire and primarily engage in low-level, routine tasks without exercising specialized knowledge. KPMG counters that Audit Associates, despite being entry-level, perform informed judgment tasks characteristic of accounting, relying on specialized education for professional accreditation.
The standard of review for summary judgment is de novo, assessing if there is any genuine dispute of material fact, with the exemption determination being a mix of law and fact. Both parties agree on the nature of Audit Associates’ duties as the most junior members of audit teams, performing basic tasks under senior supervision, with their contributions reviewed before finalization. Typical responsibilities include inventory observation, financial reporting walkthroughs, and work paper preparation, with a potential promotion to Senior Associate after two years of satisfactory performance. Overall, both parties concur that Audit Associates' work is integral to producing audit opinions characteristic of the accounting profession.
The dispute centers on whether the work performed by Audit Associates at KPMG is sufficiently "pre-determined" and whether oversight by senior members prevents these associates from exercising the professional judgment typically expected in accounting roles. There is consensus on the educational qualifications and training provided by KPMG, but contention exists regarding how much the training and tasks relate to the educational backgrounds of the Audit Associates. The crux of the dispute is whether the nature of their work excludes them from overtime benefits under the Fair Labor Standards Act (FLSA), which is a legal question.
The "advanced knowledge" requirement for the professional exemption under FLSA regulations is defined as work that is predominantly intellectual and requires consistent exercise of discretion and judgment, as opposed to routine tasks. Certified public accountants and similar roles are explicitly recognized as learned professionals. If the Audit Associates' work aligns with these definitions, the professional exemption likely applies. However, plaintiffs argue that their work is routine and lacks the necessary discretion and judgment. The regulations caution that roles typically engaged in routine tasks, such as clerks and bookkeepers, do not qualify for the exemption. Further, while discretion and judgment are not elaborated upon in the context of the professional exemption, parallels with the administrative exemption provide clarity on how discretion manifests in professional roles, particularly regarding influence over management policies and business objectives.
The interpretation of "discretion and judgment" in the context of professional exemptions diverges from the similar term used in administrative exemptions. While some circuits have referenced the administrative exemption's criteria, a distinction is made: professional discretion is based on expertise in a specific field, unlike the broad discretion seen in general corporate decision-making. The administrative exemption identifies workers whose duties are primarily management-related, as outlined in 29 C.F.R. 541.200(a)(2). The standard for administrative work requires evidence of "independent judgment," while the professional exemption does not. Courts assessing whether accountants qualify as learned professionals focus on their application of accounting knowledge alongside discretion and judgment. Importantly, the Secretary of Labor has noted that the standard for professional exemptions is "less stringent" than that for administrative exemptions. The professional exemption emphasizes the application of specialized knowledge with discretion, as opposed to managerial decision-making. Although the Department of Labor’s interpretations are not legally binding, there is a general tendency to defer to its interpretations unless they are clearly erroneous or inconsistent with the law.
The administrative exemption should not be applied uncritically to the learned profession exemption. The advanced knowledge requirement under the professional exemption focuses on the importance of an employee's duties, the frequency of discretion exercised, the level of supervision, and the proportion of time spent on such duties. Courts have indicated that discretion in applying advanced knowledge involves interpreting and analyzing information essential to the profession. Examples include a human resources consultant and pharmacists, where discretion and judgment were exercised despite following some established guidelines. The learned professional exemption can apply even if employees perform routine tasks, as long as they maintain discretion in their professional duties. Positions classified within the professional exemption may still involve clerical tasks and adherence to guidelines without negating the exercise of professional judgment.
Athletic trainers in Owsley demonstrated discretion and judgment despite operating within standard treatment guidelines and under a team physician’s supervision, as there was no expectation of immediate physician intervention nor consistent oversight of trainers' activities. Their ability to make specialized decisions informed the interpretation of "work requiring advanced knowledge" within the learned professions exemption. Cases like Rutlin and De Jesús-Rentas highlighted that professionals, such as funeral directors and pharmacists, exercise discretion through decisions characteristic of their respective fields. Unlike the administrative exemption, which focuses on management policies, the professional exemption emphasizes discretion and judgment pertinent to the profession. This aligns with Supreme Court guidance advocating for a functional approach to evaluating employee responsibilities within their industry. In the context of accounting, while its status as a learned profession is established, the defining characteristic of accountants’ work involves applying "appropriate professional skepticism," which entails critical evaluation of audit evidence and vigilance against potential fraud.
To qualify as professional accountants, workers must primarily engage in professional skepticism to maintain the integrity of financial accounting, as defined by 29 C.F.R. 541.301(a). This skepticism involves a substantive understanding of audit materials and the ability to identify irregularities, exceeding the mere occasional exercise of professional judgment. Workers performing routine data tabulation do not demonstrate professional skepticism simply by reporting errors. Professional skepticism requires a knowledgeable attentiveness to potential accounting improprieties during audit-related tasks.
Audit Associates at KPMG are acknowledged to perform essential audit functions, such as inventory observations and preparation of work papers. While plaintiffs recognize that these associates are expected to practice professional skepticism, they argue that this is limited to reporting errors and maintaining professionalism, which downplays the necessity for advanced knowledge and judgment. The plaintiffs assert that the routine nature of their work, reliance on templates, and extensive supervision diminish their discretion and the application of specialized skills, ultimately reducing their tasks to simple common sense exercises rather than true professional accounting.
Audit Associates perform assigned audit steps without exercising discretion, relying heavily on templates and guidance programs. Plaintiffs argue that the duties of Audit Associates, such as identifying stale inventory and documenting client interactions, do not require significant intellectual engagement. They characterize Audit Associates as entry-level employees who depend on reference materials and lack the experience of senior auditors. However, it is acknowledged that they sometimes utilize advanced accounting knowledge and judgment, as they may be the sole team member present during inventory observations. Although first-year Audit Associates infrequently lead audits, their involvement in these roles suggests they are not solely reliant on rote guidance. The plaintiffs' assertion that Audit Associates do not make critical evaluations or judgments about audit evidence is countered by evidence that their tasks involve substantial application of accounting principles and professional discretion, including testing controls and conducting thorough documentation processes.
Audit Associates produce essential work papers that document the results of assessing client control processes but do not draw conclusions on their effectiveness. Plaintiffs argue that this documentation process involves only narrow, discrete tasks requiring no advanced knowledge. However, the tasks performed are integral to forming audit opinions, which are KPMG's primary product. The division of these tasks into simpler components does not negate the professional skepticism and judgment required of accountants. Using an analogy, the excerpt compares the audit process to medical diagnostics, asserting that even basic tasks require professional judgment and cannot be performed successfully by untrained individuals solely by following protocols. Plaintiffs acknowledge that Audit Associates must maintain a "questioning mind," which reflects the mindset of trained accountants. Their work involves collecting and analyzing client information, producing written work that necessitates judgment—similar to roles recognized in other professions. The key distinction lies in understanding that while Audit Associates are entry-level professionals, they still engage in professional activities requiring specialized knowledge and judgment. The learned professional exemption under the Fair Labor Standards Act (FLSA) does not necessitate that these professionals make high-level decisions, but rather that they perform tasks embodying professional knowledge and judgment. By testing controls, conducting inventory reviews, and replicating the audit process, Audit Associates engage critically in their work, supported by guidelines and supervision suitable for their junior status.
Utilization of guidelines does not diminish the professional quality of work requiring specialized knowledge. Workers must exercise discretion to deviate from standard operating procedures (SOPs) when necessary to fulfill their primary duty, such as ensuring patient health. This discretion is inherent in the role of Audit Associates, who, while often following predetermined tasks, must apply specialized knowledge to make informed decisions that may require deviation from guidelines.
Plaintiffs argue that Audit Associates merely relay information to senior accountants, who make final determinations. However, this supervision is standard in professional settings and does not undermine the professional status of junior staff. Rather, it enhances the quality of work and provides training. Even under supervision, Audit Associates must apply skepticism and professional judgment, especially when encountering conflicting information or lack of evidence.
The plaintiffs' claim that Audit Associates lack discretion misunderstands the nature of professional judgment, which involves recognizing when to seek guidance based on their advanced knowledge. Identifying errors during audits is a critical exercise of accounting expertise, distinguishing them from non-professionals. The plaintiffs fail to provide evidence that would support a characterization of Audit Associates as anything less than accountants in their role of reviewing client procedures and producing work papers, which are essential for audit reports. Their argument relies on an arbitrary distinction between the actions of Audit Associates and their supervisors.
Audit Associates are classified as learned professionals under Department of Labor Regulations, distinguishing them from routine workers like clerks and bookkeepers. The argument that their work becomes fundamentally different upon review by senior staff is unpersuasive. The inquiry into their job duties does not raise factual disputes, as their responsibilities clearly require the advanced knowledge and professional judgment characteristic of trained accountants. For classification as learned professionals, two criteria must be met: exercising discretion and employing advanced knowledge acquired through specialized education. While Audit Associates demonstrate discretion in their roles, the plaintiffs argue that their formal education was not essential for performing their job functions and that skills were primarily learned through training at KPMG. However, prevailing case law from other circuits indicates that a few years of specialized training, often signified by a relevant bachelor's degree, typically satisfies the educational requirement.
Generic non-specialized educational requirements do not meet the standards for specialized instruction necessary for certain professions, as established in various court cases. For instance, a bachelor's degree in any field is inadequate for probation officers (Dybach v. Fla. Dept. of Corrections) and a combination of hands-on training and fieldwork does not fulfill educational requirements for emergency medical technicians (Vela v. City of Houston). Similarly, a blend of general education and specialized apprenticeship fails to satisfy educational criteria for airfield supervisors (Fife v. Harmon).
In this context, the central issue is whether Audit Associates at KPMG meet the educational requirements for their roles. Plaintiffs concede that these associates are typically required to be eligible for CPA licensure, with the majority holding accounting degrees. The term "customarily" is pivotal in determining if the educational qualifications are met, implying that most professionals in the field need specific academic training. The inquiry focuses on whether the majority of Audit Associates require prolonged specialized education to function as accountants.
Despite plaintiffs' claims that the presence of even one Audit Associate without an accounting degree raises a material fact issue, this argument is refuted by the overwhelming evidence of the educational background of the majority. Furthermore, while plaintiffs argue that Audit Associates' work relies on KPMG's internal materials rather than their advanced knowledge, the law distinguishes between learned professionals and those who gain skills primarily through on-the-job experience. As established in Young v. Cooper Cameron Corp., the lack of formal specialized training disqualifies certain professions, such as journalism, from being classified as learned professionals for overtime exemptions. Thus, the educational requirements for professional exemption remain unmet if the education does not provide a significant degree of specialized training relevant to the job.
Plaintiffs argue that KPMG's hiring practices for Audit Associates, who possess only bachelor's degrees in accounting or equivalent qualifications, contradict the assertion that they perform professional work requiring specialized knowledge. However, the court finds that Audit Associates exercise the discretion and judgment typical of learned professionals, supported by extensive training beyond a brief introductory course. The plaintiffs fail to substantiate their claims, relying solely on a lead plaintiff's unsupported assertion regarding the nature of on-the-job training. The court concludes that the specialized training received by Audit Associates meets the professional exemption criteria.
Regarding the plaintiffs' contention that summary judgment was premature due to insufficient discovery, the court reviews the district court's decision for abuse of discretion. The judge proposed limited discovery focused on establishing whether Audit Associates qualify as exempt professionals before broadening the scope of discovery. This approach was deemed reasonable, as it allowed for a resolution of a critical legal question without unnecessary expenditure of resources. The plaintiffs' counsel agreed to this limited discovery plan, reinforcing the court's conclusion that there was no abuse of discretion. Ultimately, the evidence gathered was adequate to address the professional exemption issue, indicating that only genuine disputes over material facts would preclude summary judgment.
Further evidence is deemed unlikely to assist the plaintiffs, as extensive discovery has already taken place. The district court’s decision to halt discovery is upheld, affirming that the plaintiffs do not fall under the protection of the Fair Labor Standards Act (FLSA). The court emphasizes that the FLSA serves as a protective measure for vulnerable workers rather than a tool for well-established professionals to claim unbargained benefits.
Audit Associates, although early in their careers, are classified as learned professionals exempt from FLSA overtime requirements under 29 C.F.R. 541.301. They engage in essential accounting tasks and are well-compensated at a leading accountancy firm. Unlike cases where workers were deemed akin to bookkeepers, Audit Associates have significant client interaction and responsibilities that align with professional accounting roles.
The job title "Audit Associate" represents a stepping stone within the profession, with clear pathways for advancement to Senior Associate after two years, contingent on performance. The hierarchical nature of their work includes rigorous review processes, consistent with industry standards. The qualifications of the 1,096 Audit Associates involved in the case indicate a high level of education, with 82% holding degrees in accounting or related fields, and the remainder possessing qualifications that allow for CPA eligibility.
