Executive Summary: Under California law, employers are required to pay employees for "all hours worked" when subject to the employer's "control." This raises the question: if an employer uses a timekeeping system that automatically rounds employee time punches up or down to the nearest quarter hour, is that lawful? The California Court of Appeals recently said "yes"—depending upon whether the rounding policy and practice are both neutral.
Under federal law (29 C.F.R. § 785.48), generally employers may round employee hours to the nearest five minutes, or to the nearest one-tenth or one-quarter of an hour, as long as the use of the rounding policy will not result, over a period of time, in undercompensating the employees for all the time they have actually worked. In 2012, this federal law was applied in California in See's Candy, Inc. v. Superior Court, in which the California Court of Appeals determined that an employer's policy that rounded employees' time to the nearest one-tenth of an hour was lawful under California law. In so finding, the court in See's Candy held that a rounding-over-time policy does not systematically undercompensate employees where it is "neutral, both facially and as applied," because "its net effect is to permit employers to efficiently calculate hours worked without imposing any burden on employees."
On June 25, 2018, the California Court of Appeals in the class action case AHMC Healthcare Inc. v. Superior Court reviewed an employer's policy of rounding time to the nearest quarter of an hour and, following a 2016 Ninth Circuit decision, reached the same conclusion that the rounding policy was lawful.
In reaching this conclusion, the court in AHMC first reviewed the rounding policy for its facial compliance and determined that the policy of rounding all employee time punches to the nearest quarter-hour "without an eye towards whether the employer or the employee is benefitting from the rounding" is a neutral policy on its face.
Next, the court reviewed the rounding policy when put into practice to determine compliance—to see if the actual practice of rounding was also neutral.
Reviewing the rounding policy for compliance in practice, the AHMC court opined that the law does not require that every employee "gain or break even" every pay period or set of pay periods because fluctuations from pay period to pay period are expected. A rounding policy is neutral in practice where the system is fair and neutral (e.g., the employer has a facially compliant system to round time, and the employer does not act to use the system against employees with the intent to underpay them) and does not systematically undercompensate employees where it results in a net surplus of compensated hours and a net economic benefit to employees viewed "as a whole." In AHMC, the parties presented evidence that, overall, the rounding policy benefitted employees and caused the employers to overcompensate them.
The court found that even though one of the employers' facilities benefitted more than the employees by a slight margin, the employers' policy and practice of rounding to the nearest quarter hour was still lawful where (1) the rounding system was neutral on its face, and (2) the rounding system, in practice, overcompensated employees overall by a significant amount to the detriment of the employers. The court held that the burden on the employee plaintiff is to establish "systematic undercompensation"—if the plaintiff's only proof is that a slight majority of employees lost minor amounts of time over a particular period, it will not be enough to invalidate an otherwise neutral rounding system.
The Bottom Line
Every employer using a rounding policy for recording employee time worked should be attentive not only to the policy itself, but also to its net effect on wages paid over time. Employers should work with counsel to ensure their policies are applied evenly across the board and do not result in a significant net cost savings to the employer. While a rounding-over-time policy may allow employers to more easily and efficiently calculate employee hours, the maintenance of any such policy will require employers to conduct regular audits to ensure those policies (1) apply to all employee time punches without regard to whether the employer or employee benefits from the rounding, (2) result in a net surplus among employees of compensated hours over time, and (3) do not work against a particular set of employees resulting in the employer's cost savings.
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