Accounting for the hours: Navigating the complexities of overtime

Register now

All business owners are aware that operating a successful company in any industry requires compliance with a myriad of employment laws. Accounting firms may be under more scrutiny than those in other fields, as they are careful to advise their own clients about the persistence of compliance.

The government takes a tough stance on issues of wages, and thus, failing to comply with these laws can result in an expensive lesson. But the laws and regulations in this particular area are voluminous and nuanced, so it may be difficult to keep up with current regulations. Owners of accounting firms may make mistakes simply because they are unaware of the application of a particular aspect of the overtime and minimum wage laws. Statistics show that unpaid or minimum wage violations constitute the greatest volume of employee lawsuits. As such, compliance is critical and business owners should take the necessary steps to avoid the consequences.

Business owners must be aware that the federal overtime law, the Fair Labor Standards Act, applies to employers regardless of the number of employees they have. A small accounting firm must adhere to the same standards and regulations that a Big Four firm like Ernst & Young follows, so long as it has at least $500,000 in annual gross revenue.

However, a family-owned accounting firm with only six or seven employees may experience issues that would not happen at a Big Four firm. At a large firm, a bookkeeper would never think to relinquish their right to overtime, but perhaps in a smaller setting, the bookkeeper, wanting to be a team player, would consider agreeing to waive their right to overtime compensation. However, the law provides that an employee cannot waive their right to overtime compensation, and any agreement to that effect is null and void. Any non-exempt employee who works more than 40 hours in a single workweek must be paid overtime compensation at the rate of time-and-one-half or their regular rate of pay, or half-time, as appropriate. Failure to properly pay overtime can result in having to pay double damages, as a penalty.

The firm, as the employer, is also responsible for maintaining accurate time records. The employee has no legal responsibility to keep track of hours worked. In lieu of accuracy in recordkeeping, the law allows an employee to simply aver that they worked an average of “X” number of hours per week, thus shifting the burden to the company to disprove the employee’s claim.

The most onerous problem area, however, is misclassifying employees as exempt from the overtime law. While it is simple enough to say accountants are exempt and bookkeepers are not, there are those that have differed with this assertion because exemptions focus on the employee’s actual day-to-day job duties and responsibilities, and not the job title. This has been the source of several contentious cases in recent years.

The most common exemptions for an accounting firm under the FLSA are the managerial, administrative, and professional exemptions. Under all of these exemptions, the employee must be paid a minimum salary of at least $455.00 per week for all hours worked, whether under or over 40 hours, which salary is not subject to deduction, and all require the employee to exercise a certain level of discretion and independent judgment. The remaining criteria as to whether an employee qualifies for a particular exemption will depend on numerous factors, including, but not limited to, what the employee’s primary duty is, whether they supervise other employees, and whether they have advanced knowledge customarily acquired by a prolonged course of specialized intellectual instruction in a field of science or learning.

From 2011 through early 2014, there were several class-action lawsuits filed against the Big Four under the FLSA and similar state laws alleging that unlicensed staff or junior accountants were not exempt from overtime pay. The critical issue in these cases depended on specific factual disputes regarding the employees’ actual job duties and responsibilities and whether they exercised discretion and judgment to determine if they fell under the learned professional exemption. All of these cases settled prior to a dispositive ruling, and as such, the public accounting profession was deprived of a definitive direction on the matter, until the summer of 2014, when the United States Court of Appeals for the Second Circuit (which governs Connecticut, New York, and Vermont), held that unlicensed accountants conducting audits at Big Four firm KPMG were exempt from the overtime pay requirements under the professional exemption. The firm successfully argued that these professionals are learned, educated and their responsibilities require them to exercise discretion and professional judgment. (Pippins v. KPMG LLP, 759 F.3d 235, (2d Cir. 2014)

While decisions from the Second Circuit are not necessarily binding on other circuits, given that there are no contrary rulings from the other circuits, the decision certainly is persuasive in other jurisdictions. The prevailing winds seem to still be blowing in this direction — until another case changes the path. Across the country, court dockets are filled with lawsuits that can set new precedents in the accounting industry. The best and most prudent course of action for a firm to protect itself is to consult with an attorney who is experienced in labor and employment law to ensure compliance with this complicated and nuanced area of the law.

For reprint and licensing requests for this article, click here.
Overtime rule Practice management Minimum wage