KPMG Canada Settles Overtime Suit – Or Do They?

Attention! Attention! According to the 21 February 2008 article of Globe and Mail in Canada (see http://www.theglobeandmail.com/servlet/story/LAC.20080221.ROVERTIME21/TPStory/Business), the KPMG unpaid overtime lawsuit is still pending and KPMG has NOT settled.

“Douglas Elliott, who filed suits against Canadian Imperial Bank of Commerce and Bank of Nova Scotia last year on behalf of employees who say they should have received overtime pay, said KPMG ‘is clearly trying to go around the plaintiff’s lawyers to deal directly with the employees.'”

To nyc staffer, you need not look across north of the border when you could look to the west coast: your “counterparts” in California already have separate pending unpaid overtime lawsuits against the big 4 accounting firms: PwC, Ernst & Young (www.eylawsuit.com or big4lawsuit.com), Deloitte & Touche (www.dtlawsuit.com), and KPMG.

If you’re asking about KPMG Canada unpaid overtime lawsuit, http://www.jruslaw.com/classactions/kpmg.shtml is the website.

If you’re asking about KPMG in the United States, there appears to be at least two pending unpaid overtime lawsuits: 1) there’s one in California (I have not found a website for that) and 2) there’s one in Washington state (I think that one is being handled by the same people who brought suit against Ernst & Young). Who knows? There could be others too.

In the “older” days of the then Big 8 Firms, staff people in audit (everyone below manager) were actually paid overtime. I don’t think we were paid at 1.5 the hourly rate, but were paid for hours worked, or we could take additional time off. That changed perhaps in the late 1980’s, perhaps in response to the changing/clarifying laws that define exempt employees.

The second big change, which disturbs me greatly to this day, is that Firms used to pay for unused vacation. Now, it is a policy of “use it or lose it” – which I think is total nonsense, because often time professionals are pressured to work the big hours, and the ability to take all vacation is diminished. Seems like there would be a lawsuit there, not based on the state laws, but based on the linkage of overt/subtle pressure to work billable hours and the ability to take all the vacation days.

With respect to the OT issue, it seems the Firms are applying the state laws, and so the real question is whether it is “fair” not to pay OT, or in lieu of OT, pay a variable bonus that would be computed based on OT hours, regardless of peformance rating. Most Firms pay a merit bonus to employees, but for many there would be no linkage to OT hours worked.

Permit me to demonstrate a situation where it would be totally unfair to pay OT – in this little scenario, lets assume that there is an audit client where the engagement letter specifies that the fees are based on hourly rates and actual hours incurred – in other words, the fee increases with every hour incurred. So the Firm gets “variable revenue”. However, given the cost structure (no OT), the cost element is essentially fixed, and there might be a motivation by the partner to increase profits to the Firm by running the engagement on high OT. Based on this example, I personally believe that there is an ethical issue. To make this hit home, during the first year of SOX (2004), and also the year after, many of Big 4 engagements were based on hours incurred x hourly rates. Big 4 Firms were rejecting “fixed fee” engagements, and partners that agreed to such arrangements were placed into the dog house. But wait, it gets better – during 2004/2005, OT hours went way, way up, as none of the Firms had enough professionals. You may recall all firms were also raising the hourly rates through the roof (BTW, PwC was the most agressive, and this bit them back in a huge way during the 006/2007 timeframe as many of their clients rebelled) while at the same time culling smaller, less profitable clients. The much higher billing rates were rationalized because of “extra risks” and “more specialized knowledge” required. Many clients actually agreed to the higher billing rates and the underlying rationalization, which in reality was only partially true.

In summary, the real story is that per partner profits went up big in 2004/2005 not just because of increased billing rates, but also went up because of using unpaid OT hours by the managers and staff to get the work done (think higher volume of regular hours and higher volume of OT hours which are pure profit). Go back and read that preceding sentence – those OT hours were pure profit baby.

As Paul Harvey might say, “And now you know the rest of the story”.

Final Four Guy