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Courts on the move: recent rulings provide limited guidance to the question: who's exempt?

Are unlicensed accountants exempt from California overtime, meal and rest period, as well as other wage and hour laws? While CPA firms haw grappled with this issue for years, a trio of 2011 appellate cases started to give firms some--albeit limited--guidance.

Still, having some guidance may be better than none at all. It lakes just one disgruntled former or current employee to create havoc for employers who Fail to properly classify their employees as exempt or nonexempt. Such employers find themselves saddled with costs dial include four or more years of unpaid wages, plus interest, statutory penalties and attorney fees

Note that while it is more correct within California accounting firms to refer to their professionals who are not yet licensed CPAs as "GPA candidates." the courts refer to this group of workers as "unlicensed accountants." Well use the latter term in this article.

In Campbell v. PricewalerhouseCoopers, the Ninth Circuit Federal Court of Appeals overturned a lower court's grant of partial summary judgment in favor of some 2,000 unlicensed accountants in a wage and hour class-action lawsuit against their employer, PWC. The lower court had ruled that, as a matter of law. PWC unlicensed accountants could not possibly be exempt from california's overtime laws. The court reasoned that PWC's unlicensed audit department accountants could only qualify as exempt under the specific exemption for accountants licensed in California.

On appeal, PWC persuaded the Court of Appeals to overturn the lower court's decision. The Court of Appeals held, among other t lungs, that unlicensed accountants were not categorically ineligible from overtime wage under the Industrial Welfare Commission Wage Order's professional exemption. The court found that the learned professional or administrative expedition could apply to unlicensed accountants depending on their "actual job duties and responsibilities"


As such, the Count of Appeals reversed summary judgment and sent the ease back 10 the lower court to determine whether the employer can prove that actual job duties and responsibilities of die unlicensed accountants warrant exemption applicability.

Shortly before the Campbell federal appellate decision, the California Court of Appeal in Sorters fed! v. CBL Southern California. LLC upheld the lower court's denial of class certification in lawsuit brought by unlicensed entry-level accountants against CBIZ. The Soderstedl plaintiffs claimed than as unlicensed accountants, they could not be deemed exempt.

In denying the class certification, the court of Anneal agreed with the lower court in finding that the administrative exemption requires a factually intensive analysis and cannot be decided on a class-action basis. Further, the Court of Appeal rejected (he plaintiffs argument (also used in the Campbell case that unlicensed accountants could never qualify as exempt.

The Court also found that even though exempt workers in California must exercise independent discretion and judgment under only general supervision, that standard could still be satisfied notwithstanding that A1CPA professional standards require unlicensed professionals (o be supervised.

In a third case involving unlicensed employees albeit not accountants], the California Court of Appeal in Zelmko-Barrett v. Brayton-Burced recently found that the actual job duties performed by a law clerk, who had graduated law school, but was not vet a licensed attorney; quality him as a "learned professional" exempt from California wage and hour laws.

Here, the court found that, while the clerk was supervised, he worked like an attorney: lie collected and assimilated evidence, performed legal research and drafted legal memoranda and exercised a significant amount of discretion and independent judgment.

By analogy; zelasko-Barrctt seems appealing to accounting firms for its outcome; however, it's a lone case and it's unknown what reaction the California Labor Commissioner, Industrial Welfare Commission and Legislature will have to it.

Together, these cases seem to ease up exemption possibilities for employers, but they do not find that any unlicensed accountants 4 are exempt. Those determinations will be made another day. Moreover, the guidance of these cases is only as good as the employer's ability lo meet the factual burden of proof on a ease-by-ease, employee-by-employee basis that actual duties and responsibilities meet exemption criteria.

Exemption Criteria

There are two basic tests salary basis and duties that must be satisfied to qualify for exemption, industrial art Com mission Order 4 contains the tests, among other wage and hour rules, applicable to accounting firms. See for more information. An overview of the two tests, and most exemptions, follows.

Salary Basis

This test requires that the employee be paid a alary that is at least twice the nation's minimum wage, which is S8 per hour. This amounts to a monthly salary be at least S2.777.33. With limited exception, the salary amount cannot be deducted from or added to because of actual hours worked. A salary is to be paid regardless of how many or how few hours it takes to get the job done.


This is where the intensive tactual analysis Of job duties and responsibilities happens, both when an employer evaluates and selects classification and when a court or Labor Commissioner judges it. This lest requires that employees "primarily" (i.e., more than 50 percent) spend their working time performing exempt duties. Most overtime litigation spawns from this more difficult test, particularly since the law and die California Department; of Industrial Relations state that job titles, large salaries and highly skilled work are not determinative.

Instead, employers must analyze the work performed by each employee under specific exemptions.

Professional Exemption Duties

Exemption from overtime pay under the professional exemption requires that the employee:

* Be licensed in California and "primarily" spend their working time engaged in the practice of law, medicine, dentistry; optometry, architecture, engineering, teaching or accounting; or "primarily'" engaged in an occupation commonly recognized as a learned or artistic profession as declined in Wage Older 4; and

* Customarily and regularly exercise discretion and independent judgment when performing that work.

The exemption analysis of licensed California CPAs usually stops here if the salary basis test has been met. With some courts suggesting that it. is possible for an unlicensed accountant to be exempt as a learned professional, that exemption requires that the employee be "primarily" engaged in the performance of:

* Work requiring knowledge of an advanced type in a field or science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study; as distinguished from a general academic education and from an apprenticeship, and from training in the performance of routine mental, manual, or physical processes, or work that is an essential part of or necessarily incident to any of the above work; and

* Work that is predominantly intellectual and varied in character far opposed to routine mental, manual, mechanical or physical work) and is of such character that the output produced or the result accomplished cannot be standardized in relation to a given period of time.

The California Labor Commissioner has consistently taken the position that to qualify for the "learned" exemption, the position must require one to have an "advanced degree," college or beyond "as distinguished from a general academic education and from an apprenticeship and from training in the performance of routine mental, manual or physical processes."

On first glance, the learned professional exemption seems too good to be true and it may be. On reflection, as with most all of the duties tests, a fact-intensive, critical evaluation of the actual job duties and responsibilities must be made.

Administrative Exemption Duties

Administrative exemption requires that the employee "primarily:"

* Spend working time performing the duties that are office or non-manual work directly related to management policies or general business operations of the employer or its customers;

* Regularly exercise discretion and independent judgment; and

* Regularly and directly assist a proprietor, other executive or administrator; or perform, under only general supervision, specialized work requiring specialized training, experience or knowledge; or executes, under only general supervision, special assignments and tasks.

Executive Exemption Duties

Executive exemption requires that the employee "primarily"

* Manage the enterprise of the employer; or customarily recognized unit or department of the employer;

* Direct or supervise the work of at least two full-time employees;

* Exercise authority to hire, fire, promote or change the status of other employees or their recommendations for such changes are given weight; and

* Customarily and regularly exercising discretion and independent judgment.

Duties Tests Analysis

At a typical accounting firm, CPAs licensed in California, non-CPA CEOs, COOs and CFOs, office managers and some controllers are all probably exempt. Receptionists, messengers and file clerks are usually nonexempt. Secretarial, payroll, payables and receivables employees are typically nonexempt.

The hard work comes from analyzing unlicensed accountants who may be titled "managers," "seniors" and "juniors."

Job titles aside, the employee's staled desire to be treated as exempt and what others in your profession do haw been made nearly irrelevant in overtime exemption litigation. one way lo lake a list pass at exemption analysis is to identify an employee's five or six job duties that regularly consume more than hall of the employee's work time. Consider paper and electronic records as evidence, just like it would in litigation.

Do the primary duties appear m fall into an exemption? If they do. dig deeper, like a plaintiff's lawyer would. II' they do not, dunk about how dunes might be adjusted to meet an exemption. Gel help from labor counsel. who may be able 10 do the work under shield of attorney work product and attorney client privilege. a human resources professional.

Alternatives to Overtime Pay

Limit Overtime Worked: Manage your business so that employees do no( work more, or much more, than the ht-hour-a-day threshold for daily overtime pay entitlement. I'. zasier said than done during busy season, unless a (inn can stair up when needed and lay-only employees during slow limes, and still retain (lie ability lo recruit skilled employees.

Make-up Time; Make-up time California law encourages employers to permit employees to: work up to three hours csim in one day to make up for work they missed because of a personal obligation in die same week. Basically; these make-up hours are paid at straight time and not at the (ime-and-a-hall overtime on if:

* The employee requests the time off and the make-up lime in writing in advance and the employer grants tin-request in Us discretion;

* Make-up lime is taken in die same week in which die lime off was taken;

* The employer cannot solicit employees (o ask or make-up lime to avoid overtime

* The employer must pay overtime on hours worked in a week in excess of 10 regardless.

Alternative Work Week Schedules: On a two-thirds serrel vole of employees in a work unit, an alternate work schedule can be adopted that permits employees to work longer days al straight lime pay in exchange their working fewer days in a work week.

For this purpose, "work unit" means employees in a readily identifiable group, such as a division, a department, a job classification, a shift, a separate physical location or a recognized subdivision of one of those groups. A common alternate work schedule consists of four, 10-hour days.

Among' many alternate work schedule rules contained in die Wage Order, the employer must:

* Report secret vote results 10 the Department of Industrial Relations within 30 clays of the vole;

* Have an alternate work schedule with a straight time maximum of 10 hours in one day and 40 in one week:

* Provide reasonable accommodation to employees who are unable to work the alternate work schedule;

* Conduct a secret repeal vole on petition of one-third of affected employees and then repeal the alternate work schedule if two-thirds of the employees vole to repeal; and

* Not reduce the regular rate of pay as a result of adoption, repeal or nullification of an alternate work schedule.

Compensatory Time-off: Sometimes weekly make-up time and alternate work schedule are not flexible enough. In lieu of paying for overtime, some employers use compensatory lime oil' programs to "bank" overtime hours worked during busy limes, and To permit the lime off lo be drawn down as paid lime off during slower seasons.

However, the federal Fair Labor Standards Act, which generally applies to employers with revenues of S500,000 or more and engaged in "interstate commerce" essentially bans compensatory time off (or nonexempt employees who do not work for the government-although in some cases the FLSA permits compensatory time of accrual and use within a two-week period.

It's surprising just how many employers are governed by the FLSA. For example, an accounting inn that provides services only from offices located in California, docs no work or out-of-state clients and no out-of-state marketing may not be FS1A governed, but, does tiling federal tax returns change that?

If the FLSA does not block a compensatory time oil program, California law permits them for accounting firms' nonexempt employees if 'more than a dozen conditions are met, including:

* The employer and employee must sign a written agreement, or be subject to a collective bargaining agreement, permitting compensatory time off before the work is performed;

* The employee can accrue a 240-hour maximum of compensatory lime off and overtime pay must be paid each payroll period after that;

* The employee requests compensatory time olV in writing in lieu of overtime pay;

* The employee must be regularly scheduled to work no less than a 40-hour week; and

* Accrual of compensatory time off hours must be at overtime (i.e., 1.5 or 2 hours for an hour).


While some accounting firms see the Campbell and Soderskdi cases as promising, trial and subsequent appeals in Campbell may take years to conclude.

Regardless of the outcome4, because it is a federal court case, Campbell is not binding in California state courts where most wage and hour cases in our slate are fought.

Nonetheless, the reasoning in Campbell and Sodcrsledi and the holding in Zelasko-Barrett may be an indication as to how courts will view the exempt classification of unlicensed accountants.

Until the California courts have settled whether or not unlicensed accountants are exempt from overtime, meal and rest period and other wage and hour laws. employers should tread carefully in employee classification issues, as well as review and update their personnel practices and policies with the advice of experienced labor counsel or human resources professionals.

Mark E. Terman, Esq., and Pascal Benyamini, Esq., are partners in the national law firm of Drinker Bideile & Reath LLP. You can reach them at and, or
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Title Annotation:exemptnonexempt
Author:Terman, Mark E.; Benyamini Pascal
Publication:California CPA
Date:Mar 1, 2012
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