Payroll Timekeeping Practice of “Rounding” Is Permissible in California

Overturning a trial court determination that California law does not permit “rounding” of time entries for payroll purposes, the California Court of Appeal in See’s Candy Shops, Inc. v. Superior Court holds that an employer may round employees’ clock-in and -out times to the nearest tenth of an hour, provided that the rounding is “fair and neutral” and does not result in a failure to pay employees over a period of time. The court also cited with approval legal authority that authorizes rounding to the nearest five minutes or quarter of an hour.

Although the California Labor Commissioner had a long-standing enforcement position approving of neutral time-rounding policies, this is the first decision of a California appellate court regarding the Labor Commissioner’s position under California law. This decision brings California in line with approved practices under the federal FLSA and the laws of other states.

Background

See’s Candy Shops, Inc. required hourly employees to record the start and end times of their shifts and meal periods using timekeeping software. The time records were then used to calculate employee pay, subject to two adjustments: (1) the company rounded clock-in and -out times up or down to the nearest tenth of an hour; and (2) the company applied a “grace period” at the start and end of shifts. Under the grace period policy, employees could voluntarily clock in up to ten minutes before the start of their shift and clock out up to ten minutes after the end of their shift, but pay would be based upon scheduled start and end times.

In a highly controversial decision that attracted national attention, the trial court ruled that the time-rounding and grace period policies were impermissible. See’s Candy Shops appealed.

The Court of Appeal Reverses and Approves of Rounding Policies

The Court of Appeal stated that California employers should be permitted to use the same long-standing rounding practices that are permitted throughout the United States.

The Court of Appeal held that so long as the rounding policy is neutral over time, the net effect allows employers to calculate time efficiently, with no loss of wages to employees.

Applying this analysis to See’s Candy Shops’ policy, the court found evidence that the time-rounding policy was neutral on its face because it rounded both up and down to the nearest tenth of an hour, and did not result in a loss of wages to employees over time. As a result, the Court of Appeal reversed the trial court’s ruling that the time-rounding policy was per se impermissible. The case now goes back to the trial court on the issue of whether the rounding policy is “fair and neutral” in practice, i.e., whether in practice the policy works to disadvantage the See’s Candy Shops employees.

Take-Away Messages from The Decision

• Many employers do not round time, and this decision does not establish any broader right than was previously permitted under the DOL regulations and DLSE Manual. If anything, this decision highlights that employers who use rounding may face legal challenges and the expense of defending the fairness of the practice in court. This decision also highlights that rounding cannot be used as a cost-saving measure, as any discrepancy between rounded and actual time should work in employees’ favor or, at the very least, be neutral. While some employers may find that rounding time is convenient and saves on administrative costs, any savings should be weighed against the potential costs of auditing rounded payroll records and justifying their fairness in litigation.
• With those cautions in mind, employers who do employ rounding can take comfort that time-rounding policies, when properly drafted and applied, are permissible in California. Employers should keep in mind that: (1) any rounding must be “fair and neutral,” meaning that time must be rounded up as well as down; and (2) as applied, the policy must not result in a failure to compensate employees fully over time.
• Employers who utilize rounding should conduct periodic audits of time and pay records to ensure that the rounding does not produce a net loss to employees. Employers may wish to engage legal counsel to conduct the audit so that the analysis is protected by the attorney-client and attorney work product privileges.
• The Court of Appeal did not rule on whether the “grace period” policy was permissible. At a minimum, any such policies should state that clocking in during the grace period is voluntary, that employees may not work during the grace period and are free even to leave the premises until the start of the shift or after the end of the shift, and that if an employee performs work during the grace period, he or she should notify a supervisor so that the time will be paid.
• Employers should adopt written policies providing that off-the-clock work is not permitted, and that any employee who performs work while not clocked in should notify a supervisor so that he or she can be paid for the time. In addition, supervisors should be trained on these policies and directed to inform Human Resources if they become aware of off-the-clock work, so that payment can be made.