In AHMC Healthcare, Inc. v. Superior Court of Los Angeles County, No. B285655 (June 25, 2018) (“AHMC Healthcare”), California’s Second District Court of Appeals upheld an employer’s use of a payroll system that automatically rounds employee time up or down to the nearest quarter hour. Although the California Supreme Court has not yet addressed this issue, AHMC Healthcare aligns with decisions from the federal Ninth Circuit Court of Appeals, many federal district courts, and California’s Fourth District Court of Appeals, which also upheld time-rounding practices.

At issue in all these cases is the interpretation of 29 C.F.R. § 785.48, a regulation promulgated under the Fair Labor Standards Act (“FLSA”), which permits employers to compute employee worktime by rounding “to the nearest 5 minutes, or to the nearest one-tenth or quarter of an hour,” provided that the rounding system does not, over time, result in “failure to compensate the employees properly for all the time they have actually worked.” California’s Division of Labor Standards Enforcement (DLSE) has adopted this regulation, finding it consistent with California’s employee-friendly wage policies. (See DLSE Enforcement Policies and Interpretations Manual (Revised, June 2002 Update), ¶ 47.1, “Rounding”).

Under Section 785.48, a valid time-rounding system must be neutral on its face and also in its application: on average, over time, it favors neither overpayment nor underpayment of employees. Using such a system, minor discrepancies in an individual employee’s wage calculations are to be expected; employees may gain or lose minutes (and associated compensation) in any pay period.

The employees in AHMC Healthcare argued that a rounding policy that results in any loss to an employee, no matter how minimal, violates California law. The Second District disagreed, noting that Section 785.48 applies to employees as a group, not individually. A requirement that rounding must work out neutrally for every individual employee would undercut the regulation, which promotes the efficient use of wage calculation through rounding systems.

AHMC’s timekeeping policy was facially neutral: it rounded employees’ time clock swipes up or down to the nearest quarter hour. If an employee clocked in between 6:53 and 7:07, he or she was paid as if he or she had clocked in at 7:00. If an employee clocked in from 7:23 to 7:37, he or she was paid as if he or she had clocked in at 7:30.

Determining whether a rounding policy is neutral in practice requires a statistical analysis that calculates net losses and gains to employees and employers over time, and/or calculates the percentage of employees whose compensation was reduced vs. increased over a period of time. The results of this analysis can vary depending upon the cohorts on which the calculations are based (e.g., shifts, entire facilities, all employees across facilities). Courts will closely examine the data points and methods of calculation to ensure that an employer is not manipulating the system to achieve inequitable results.

AHMC’s statistical expert examined the data for two facilities over a four-year period from three perspectives: (1) the percentage of employees who gained by having minutes added to their time, compared to the percentage who lost by having minutes deducted; (2) the percentage of employee shifts in which time was rounded up, compared to the percentage in which time was rounded down; and (3) whether the employees as a whole benefitted by being paid for minutes or hours they did not work, or whether the employer benefitted by paying for fewer minutes or hours than were actually worked.

The results in these two facilities were considered neutral overall. At one facility, the rounding procedure added time to the pay of 49.3% of the workforce, left 1.2% of the workforce unaffected, while 49.5% of the workforce lost time. Overall, the number of minutes added to employee time by the rounding policy exceeded the number of minutes subtracted, adding 1,378 hours to employees’ total compensable time.

At the other facility, the rounding procedure added time to the pay of 47.1% of the workforce, had no effect on 0.8% of the workforce, and caused 52.1% of the workforce to lose time. Again, there was a net compensable time gain for employees of 3,875 hours. Although the two named plaintiffs lost 3.7 hours and 1.6 hours of compensation, respectively, the group analysis showed a net loss to the employer and a net gain for its employees.

Thus, the fact that a very small majority at one facility lost minor sums during the time period studied did not create a factual issue as to the validity of the system, because the rounding system resulted in a net surplus of compensated hours and a net economic benefit to employees viewed as a whole. An open question is whether a rounding system is valid if it leaves employees with a small deficit in net compensated hours, or produces but a slight net economic benefit to the employer.

The AHMC Healthcare case supports the use of neutral time rounding systems in California, but exposes the complexities of determining whether such a system yields neutral effects in practice. Best practices require periodic audits and analysis of time-rounding practices.