Whistling Past the Graveyard – The Perils of Rounding Policies
Topics: Wage & Hour Issues
For decades, American employers have used the legally endorsed policy of rounding employees’ time to the nearest quarter hour. This has always been permissible, provided the policy was neutral in effect, meaning that on balance employees were not underpaid as a result. Back in the days not so long ago when payroll was calculated by scribes in green visors and sharp pencils, rounding made perfect sense, as trying to pay to the minute when someone on a 9:00 am – 5:00 pm shift clocks in a 8:57 am (so as not to violate the punctuality policy) and doesn’t leave their work station until 5:00 (again to not violate policy) and clocks out at 5:05, would have been far more cumbersome. So rounding to the nearest quarter hour was permitted, provided “it all comes out even in the wash” so as not to deprive employees, on balance, of time worked.
As a result, American employers have generally continued with this long established practice, including after virtually every business has converted to automated time keeping systems (sorry green visor folks) which have the capability to immediately calculate and pay working time to the minute, if not second. Thus, it is no longer administratively infeasible for the vast majority of American employers, of course including California employers, to pay to the minute. The regulations which provide the authority for the rounding rule also contain a requirement, in addition to the “all comes out even in the wash”, that it be infeasible to pay to the minute – which of course it was when payroll was being calculated manually. Now, however, for employers with automated payroll systems, it is not infeasible to pay to the minute. The California Supreme Court recently noted this in rejecting the notion that employers need not pay for “de minimis” time worked.
In that case, reasons most employers, it is permissible to round off those extra minutes at the beginning and end of the shift, focusing on the first part of the general rule that rounding to the quarter hour is permissible, but ignoring the condition that the rounding cannot result, on balance, of underpaying employees for time worked. So, in this example, the employees, every day, are shorted a few minutes at the beginning and end of their shifts, and by no means is the rounding policy having the actual effect of “having it all come out in the wash.” This creates significant liability not only for unpaid wages, but triggers a host of penalties making the overall liability staggering, potentially threatening the very existence of the business.
Further causing California employers to “whistle past the graveyard” of rounding practices has been the curious development of California case law in this area, first with two cases involving See’s Candy, and then two more recent cases: AHMC Healthcare, Inc. v. Superior Court and Donohue v. AMN Services, LLC. In See’s, the court upheld as lawful the employer’s practice of rounding time entries, where the employer had a policy of allowing employees to clock in ten minutes before beginning work and clock out 10 minutes after ceasing working, with additional policies stating prohibiting the actual performance of work during those “grace” periods. Expert analysis of time records showed that the time rounding resulted in a net benefit to the employees and thus was upheld. The courts in the more recent AHMC and Donohue cases also upheld employer rounding practices based on similar expert analysis of time records showing a net benefit to employees. These cases have been simplified in many popular headlines, however, as providing some bright line rule that rounding is lawful in California. “Woo Hoo!” says California employers….we can continue to round away without fear. Not really the case. In ALL these court cases, the employers won only because expert analysis of time records for a period of time luckily revealed that the rounding worked to the employees’ benefit (most of the time). The result easily could come out the other way, particularly where rounding policies are combined with strict punctuality policies (as they typically are). So to come to the conclusion that your rounding policy is fine because the decisions in these cases all said rounding is fine is to entirely miss the point, and potentially create continuing liability. In other words, those employers had a valid defense whereas few employers do. Murder is obviously a crime…..but not if done in self defense. Rounding, while far from murder, is generally impermissible also, but not if you are overpaying your employees. Why would you want to have a defense if the result is paying more wages than that law would require to you pay?
Here are the details of the two most recent decisions:
AHMC: Rounding to the nearest quarter hour for clock in and out and breaks. There were two locations at issue. In one location a minority of employees lost time and the remainder either gained or were even and overall as a group employees were compensated for more minutes than they worked. In the other location a slight majority of people lost time but overall employees were compensated more than they worked. The Court said where the system is neutral on its face and overcompensates employees overall by a significant amount to the detriment of the employer a plaintiff must do more than establish that a bare majority of employees lost a minor amount of time over a particular period. In this case the employees were compensated for over 5,000 more minutes than they worked. So AHMC “won”, but they overpaid by 5,000 minutes and certainly had to pay a fortune in legal fees on top of that to “win”.
Donohue: Rounding to the nearest 10 minute increment for clock in and out and breaks. This practice overall resulted in a net surplus of 1,929 hours paid that were not worked. Plaintiff’s expert obviously recognized this fact and instead tried to argue it was unlawful by only considering the times the employees were shorted and did not offset the time with the amounts they gained. Weak sauce.
The real take away from all this is that if you continue to have a rounding policy at all, it better result in neutral payment or overpayment – which is a virtual impossibility when combined with a strict punctuality policy. Even then, you still face risk of class action litigation and the fees that will be incurred to defend the litigation. Even if you win, it is not likely to feel like a true “win.” As a result, the best practice is to pay to the minute, which generally will result in an increase in overall labor cost, no doubt resulting in howls from the operations folks. The answer to that is to find a method of clocking in and out that results in minimizing time on the clock and not actually working….rest assured that additional labor expense will be far less than the cost of defending, and likely losing, a rounding policy lawsuit that almost certainly is resulting in overall underpayment to your employees.