Many employers use payroll systems that automatically round a non-exempt employee's time card up or down to the nearest five minute interval, tenth of an hour, or quarter hour. Such rounding practices can be subject to challenge as inconsistent with the legal requirement that an employer must pay an employee for all time worked. A California Court of Appeal recently reaffirmed that an employer’s rounding system that is neutral in policy and practice, is legally acceptable, even though the system provides a less than exact method of paying wages for all time worked.

In AHMC Healthcare, Inc. v. Superior Court of Los Angeles County, the employer’s payroll system rounded its non-exempt employees’ hours up or down to the nearest quarter hour. For example, an employee who clocked in between 6:53 a.m. and 7:07 a.m. would be paid as if they had clocked in at 7:00 a.m. A meal period that lasted between 23 and 37 minutes was rounded to 30 minutes.

Two healthcare employees for AHMC Healthcare brought a wage and hour class action challenging the payroll system, arguing that the wages of all non-exempt employees at two different hospitals should be paid based on the exact clock-in and clock-out times. The employees argued that the payroll policy was unlawful because a slight majority (52.1%) of employees at one of the hospitals lost an average of 2.33 minutes per shift and therefore the policy was not “neutral” in practice.

The Court of Appeal rejected the challenge and reaffirmed existing California law that an employer rounding policy that is neutral and does not systematically undercompensate employees over time is acceptable. In this case, the court noted that the rounding system was neutral because it rounded all employee time punches regardless of whether the employer or the employee benefited from the rounding. It also proved neutral in practice when assessed over a four year period. At one hospital, only a minority of employees (49.5%) lost time (an average net reduction of 2.04 minutes per employee shift) and, overall, the number of minutes added to all employees’ time by rounding exceeded the number of minutes subtracted. At the second hospital, the rounding policy similarly added more minutes than it subtracted overall, although a slight majority of employees (52.1%) lost time (an average net reduction of 2.33 minutes per employee). The Court concluded that this slight percentage difference did not demonstrate that the policy lacked neutrality.

The court held that the law “does not require that every employee gain or break even over every pay period or set of pay periods analyzed.” Instead, the court held that “where the system is neutral on its face and overcompensates employees overall by a significant amount to the detriment of the employer, the plaintiff must do more to establish systematic undercompensation than show that a bare majority of employees lost minor amounts of time over a particular period.”

A prior California court decision approved an employer’s practice of rounding timecards to the nearest tenth of an hour. That court left open the question of whether a rounding practice that involved a longer time increment, such as the quarter hour increment at issue here, was lawful.

Although the AHMC Healthcare decision approved a particular rounding system that used 15-minute increments, it is not a blanket endorsement of all 15 minute rounding systems. The court cautioned that a rounding system could be found biased if multiple data points revealed that the system unfairly singles out certain employees and therefore is not neutral in practice.

Any employer who uses or intends to use a time card rounding system should carefully assess whether the system can be defended as neutral. For example, the employer should ensure that the practice is applied uniformly for all non-exempt employees and allows for upward and downward rounding that does not inherently benefit the employer. Even if the practice is neutral on its face, routine audits of time records should also confirm that the rounding practice does not result in an advantage to the employer over time.

Rounding time on employee time cards, like other California wage and hour issues, is a complicated legal issue and fraught with risk. Accordingly, employers should proceed with caution. If you have questions regarding time card rounding practices, or any other issue related to employment law, please contact one of our attorneys:

Daniel F. Pyne III
Ernest M. Malaspina
Richard M. Noack
Karen Reinhold
Shirley Jackson