For decades, employers have used timekeeping practices that involve rounding, for example, rounding the employees’ “punch time” up or down to the nearest tenth or quarter hour. In the past few years, several California cases have upheld employers’ rounding practices, including a recent appellate court case that found that rounding may be used for meal periods. Despite these employer-friendly cases, employers should be aware that rounding practices still present risk and should be used, if at all, carefully.
Several California appellate courts have held that an employer is entitled to use a rounding timekeeping policy if the policy is “fair and neutral” on its face and it is used in a manner that will not result, over time, in failure to compensate employees for all the time they have actually worked.
A rounding policy is “fair and neutral” on its face if it rounds up as well as down. This factor is straightforward and easy to assess. By contrast, to determine whether the policy is used in a manner that will not result, over time, in failure to compensate employees for all time worked, the courts engage in a detailed fact-intensive review.
One analysis courts consider is the “net effect analysis.” Under this analysis, the rounded times are compared to the actual punch times over a period of months or years. Based on that comparison, the parties’ respective experts determine whether rounding resulted in the employees as a group being paid for more time than they actually worked or for less time than they actually worked. This net effect has been the most critical factor emphasized by the courts. Indeed, in every published California case in which rounding was upheld, rounding had resulted in a significant net overpayment to the employees as a group.
Another analysis courts consider is the “employee percentage analysis.” Under this analysis, the experts determine the percentage of employees who were underpaid over a period of time due to rounding and the amount of their underpayment. This analysis, while informative, is not necessarily determinative. For example, in AHMC Healthcare, Inc. v. Superior Court, the employer’s rounding practices had resulted in a significant overall overpayment for employees, but at one facility a slight majority (52%) of employees lost time due to rounding, averaging about three minutes for each of those employees. Because the employees overall benefited from the rounding policy, the court held that the fact that a slight majority of employees lost a minimal amount of time did not invalidate the rounding policy.
Additional types of analyses may be relevant for particular businesses, for example, comparisons of the effects of rounding by shift, location, department, or employee compensation level.
Notably, while the issue of rounding has been addressed by several appellate courts, the California Supreme Court has yet to squarely consider the issue. In last year’s Troester v. Starbucks decision, in which the Supreme Court rejected the federal “de minimis” rule, the Court sent conflicting signals regarding rounding. On the one hand, the Court appeared to accept that a “fair” rounding system is lawful. But at the same time, the Court held that employers must compensate employees for all time worked, including de minimis amounts of time. It is difficult to reconcile a rounding system, in which certain small amounts of time are not compensated, with the Supreme Court’s rejection of the de minimis rule.
Application to Meal Periods
Recently an appellate court considered whether rounding may be used for meal periods. In Donahue v. AMN Services, the employer used a computer-based timekeeping system that rounded to the nearest ten minute increment. The employer used the rounded time, not the actual “punch” time, to determine whether the employee received a timely and sufficient meal period. If the rounded time showed that the meal period was delayed, missed, or less than 30 minutes, a drop down menu appeared that required the employee’s response. If the employee selected the response that she had the opportunity but chose not to take a timely 30-minute meal period, the employer did not pay the statutory meal period penalty. If the employee selected the response that she was not provided the opportunity to take a timely 30-minute meal period, the employer paid the statutory meal period penalty.
The employees brought a class action lawsuit, arguing that rounding can never be applied to meal periods and that any non-compliant meal period based on actual punch times entitles the employee to a penalty. Because the drop down menu appeared only after application of the rounding policy, the employees argued the policy covered up meal period violations.
The appellate court rejected the employees’ arguments and held that rounding policies can be applied to meal periods so long as they are fair and neutral, both facially and as applied. Since the evidence showed that AMN’s policy rounded both upwards and downwards and had resulted, over time, in employees being paid for more time than their actual punch times for meal periods, the policy was fair and neutral and consistent with California law.
It remains to be seen whether other courts will likewise find that rounding policies may be applied to meal periods.
Tips for Employers
If an employer choses to use a rounding system for timekeeping, it is critical to perform regular audits of the effects of that system. The audit should evaluate whether over a period of time rounding resulted in an overpayment or underpayment to employees as a group and also calculate the percentage of employees underpaid due to rounding and by what amount. Employers should recognize that if their rounding system is challenged in litigation, the plaintiffs’ expert will slice and dice the data to best support their position, for example by selecting the time period and/or employee group that tends to show an underpayment to employees. Therefore, while an audit will be informative, there is no definitive test to determine whether a rounding system will be upheld in litigation.
Many employers began using rounding for administrative ease long ago, when payroll was generated manually. Now electronic timekeeping systems have the capability to accurately track time and generate payroll to the precise minute, if not second. Employers should evaluate whether the benefits of rounding for their business justifies the cost of regular audits and the risk and expense of a legal challenge.