A recent California Court of Appeal decision addressed the question of whether an employer’s use of a payroll system that automatically rounds employee time up or down to the nearest quarter-hour violates the requirement that employers pay their employees for all hours worked. While the court in AHMC Healthcare, Inc., v. Superior Court found the employer’s system in question to be lawful under established precedent, the opinion nonetheless implicitly flags the potential risks associated with these kinds of rounding practices. When sophisticated software exists that can compute time worked to the minute, the risks and costs of a rounding system may outweigh the benefits. Read our detailed analysis here.
In AHMC, two employees working at two different medical centers challenged the validity of the employer’s payroll system which, rather than using the employees’ exact check-in and check-out times for calculating pay, instead rounded their time, either up or down, to the nearest quarter-hour, and determined their pay based on the rounded number. Meal breaks that lasted between 23 and 37 minutes were rounded to 30 minutes, the minimum amount of time required by California law.
At both facilities, when the employees were considered as a group, the number of minutes added to employee time by the rounding procedure exceeded the number of minutes subtracted, with the result being that 1,378 hours of compensable time were added at one facility, and 3,875 hours of total time were added at the other. However, at one of the facilities, a majority of employees (52.1 percent of the total workforce) lost time due to rounding, although the amount of time lost per employee was small, particularly when calculated on a daily basis.
The employees contended that AHMC’s rounding policy was unlawful because it resulted in under-compensation for a slight majority of the employees at one facility and, further, that any policy that resulted in any loss to any employee, regardless of how small, violated California law. Both parties moved for summary adjudication on the issue of the legality of the rounding policy, and both motions were denied by the trial court, which found that triable issues of fact existed which precluded summary adjudication.
The Court of Appeal rejected the trial court’s analysis, and ordered that the employer’s motion for summary adjudication be granted. The court noted that under established precedent, a rounding policy that was fair and neutral, both on its face and in practice, and that did not result in systematic under-compensation over time, was lawful. The court found that AHMC’s policy was neutral on its face and as applied because it resulted in a surplus of compensated hours and a net economic benefit to the employees as a whole and a detriment to the employer. The fact that a bare majority of employees at one facility lost a minimal amount of time was not sufficient to create an issue of a fact as to the lawfulness of the policy.
This case has good law for employers, but it does not alter the two-factor analysis that is required for rounding policies to pass muster in California. First, the policy must be neutral both on its face and in practice and second, the policy must not result in loss of pay for employees. Because the second factor can only be determined by post-payment analysis, any violation will have already occurred before the employer can identify the problem. A policy that instead provides for payment for all time actually worked, coupled with clear work rules regarding the recording of time, will avoid the uncertainties of rounding.
Lessons for Employers
- Employers should think very carefully before adopting or maintaining a rounding system, particularly if their time-keeping systems are capable of capturing actual time worked. Often, rounding is a historic practice that was never changed after computerized timekeeping programs became available. Even a lawful rounding program like AHMC’s invites legal challenges that are costly and time-consuming to defend and have uncertain outcomes,
- The primary reason the AHMC court upheld the policy at issue was because it resulted in significant overpayment to the employee population as a whole, which means that the employer incurred substantial additional and presumably unnecessary costs by having such policy. Before adopting or maintaining such a policy, employers should determine whether a rounding system provides significant administrative benefits that would outweigh the additional compensation costs.
- The California Supreme Court has agreed to review the question of whether the de miminis defense is available under California law, and a decision is expected shortly. What impact, if any, that decision will have on the continued viability of rounding remains to be seen. Both rounding and the de minimis defense represent exceptions to the general requirement that employers pay employees for all time worked, so in addressing the de minims defense, the Supreme Court may provide further guidance to employers on whether rounding systems will remain lawful.
- Before deciding to implement or maintain a rounding system, employers should consult with experienced employment counsel to gain a thorough understanding of the potential risks of such a system and possible ways to mitigate those risks. And once a rounding system is in place, it must be accompanied by a program of regular audits designed to assess whether a system neutral on its face nonetheless results in bias against certain employees. For example, as the AHMC court noted, a rounding policy that in practice over-compensated lower-paid employees at the expense of higher-paid employees could unfairly benefit the employer and hence would be unlawful.
- Many employers have historically chosen rounding as a means to manage small increments of overtime, lines at the timekeeping equipment, and minor variations from scheduled hours. To manage employee time without rounding, employers can instead impose work rules that limit when employees can clock in and begin working relative to their scheduled start times, as well as similar rules for meal periods and ends of shifts. Though employers must compensate employees for all time clocked in, these types of work rules will accomplish the same goals in terms of work schedule and overtime management without the risks inherent in rounding. Employers may also consider installing additional timekeeping equipment if there is a wait to use available equipment.