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California Court Reaffirms And Extends Rounding Rules

In AHMC Healthcare, Inc. v. Superior Court, the California Court of Appeal, Second Appellate District, Division Four, extended a prior line of California cases holding that California law follows federal law with respect to evaluating the lawfulness of time clock rounding systems. You can read our prior article about See’s Candy Shops I here. Specifically, California follows 29 C.F.R. § 785.48, which permits employers to compute employee worktime by rounding “to the nearest 5 minutes, or the nearest one-tenth or quarter of an hour,” so long as the rounding system adopted by the employer “is used in such a manner that it will not result, over a period of time, in failure to compensate the employees properly for all the time they have actually worked.”

In AHMC Healthcare, the hospital’s rounding system rounded up or down to the nearest quarter hour. Despite the neutral rounding policy, the two named Plaintiffs’ records showed that rounding their time caused them to be minimally undercompensated as compared to unrounded time. Specifically, Plaintiff Letona, who was employed as a part-time respiratory care technician had a net loss of 3.7 hours, which translated to less than a minute of lost time per shift. Plaintiff Abeyta, who was employed as a registered nurse had a net loss of 1.6 hours, which translated to fewer than two minutes of lost time per shift.

However, the putative class numbers demonstrated that the effects of the rounding policy were even-handed. Specifically, an expert analyzed the putative class’ time records for three data points: (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 the employer benefitted by paying for fewer minutes or hours than actually worked. These numbers were critical to the Court of Appeal’s decision.

In the trial court, the Parties agreed to a set of stipulated facts (including the expert’s analysis of time records) and filed cross motions for summary adjudication (prior to class certification) concerning the legality of the rounding system. The trial court denied both Parties’ summary adjudication motions. However, the employer sought a writ of mandate. The Court of Appeal granted the employer’s writ on the basis that the hospital’s rounding system complied with California law. In so concluding, the appellate court relied heavily on the expert’s time records analysis. The analysis demonstrated that the neutral rounding policy resulted in even-handed rounding at the two hospital facilities at issue. Specifically, at the San Gabriel facility, the rounding procedure added time to the pay of 49.3 percent of the workforce, left 1.2 percent of the workforce unaffected, and 49.5 percent of the workforce lost time. Overall, the rounding policy added 1,378 hours to the employees’ total compensable time at the San Gabriel facility. Similarly, at the Anaheim facility, the rounding procedure added time to the pay of 47.1 percent of the workforce, had no effect on 0.8 percent of the workforce, and 52.1 percent of the workforce lost time. Overall, the rounding policy added 3,875 hours to the employees’ total compensable time at the Anaheim facility. Thus, the rounding policy resulted in net added time at both facilities.

Based on these favorable numbers, the hospital argued that the rounding procedure was lawful because it was facially neutral, it was applied fairly, and it actually provided a net benefit to the employees as a whole. The Court of Appeal agreed.

In its opinion, the Court of Appeal reaffirmed and extended some tenants of rounding wage and hour law. First, an employer’s rounding policy complies with California law if it is neutral, consistently applied, and favors neither the employees nor the employer to a significant degree. This rule has also been adopted by the California Division of Labor Standards Enforcement (DLSE).

Second, rounding policies are not analyzed on an employee-by-employee basis. This is because there is no “individual employee” requirements in 29 C.F.R. § 785.48. Rather, the regulation specifically refers to “employees” (plural) and contemplates the time the “employees” (plural) actually work. In fact, after describing systems that round time to the nearest increment, Section 785.48 notes that “[p]resumably, this arrangement averages out so that the employees are fully compensated for all the time they actually work,” suggesting that there is a presumption that systems that round to the nearest increment are acceptable unless it is shown that they systematically undercompensate employees. Thus, the rounding policy does not have to result in a net positive amount for every single employee. Some employees will win and some will lose under a neutral rounding policy.

Third, a rounding policy is not unlawful where a “bare majority” of employees lose compensation due to neutral rounding. For example, if 52 percent of employees have their time rounded down such that they are undercompensated, this statistic is not sufficient to invalidate a neutral rounding policy as a matter of law. The Court does not set a bright line rule for what percentage of the class “wins” or “loses” under the system, but suggests that rough parity is all that is required.

And, fourth, Plaintiffs cannot establish a claim by manipulating the class definition to include only those employees who “lost” time as a result of rounding. Again, they will need to show that the system as a whole is not evenhanded notwithstanding the general presumption that evenhanded rounding is lawful.

Despite this favorable pronunciation of rounding rules in California, the Court of Appeal did issue a bit of caution in dicta. Specifically, the Court noted that a trial court could delve into multiple datapoints to determine whether the rounding system at issue is actually neutral as applied. For example, does the rounding system overcompensate lower paid employees at the expense of higher paid employees in order to unfairly benefit the employer? Based upon this dicta, employers may consider analyzing the effect of their rounding systems on various departments, shifts, and/or compensation levels to ensure it is neutral as applied.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.


About this Author

Thomas Kaufman, Legal Specialist, Sheppard Mullin, Labor, Employment

Mr. Kaufman is a partner in the Labor & Employment Practice Group in the firm's Century City office.

Areas of Practice

Mr. Kaufman's practice is in employment litigation defense, with an emphasis on California Labor Code and federal wage/hour class actions.  Mr. Kaufman has handled class litigation matters for a wide variety of industries, including banks and mortgage lenders, hospitals, large newspapers, information technology companies, restaurants, and other retailers.  Mr. Kaufman also is...

Michael T. Campbell, Sheppard Mullin law firm, Los Angeles Lawyer, Labor and Employment Matters Attorney

Michael Campbell is an associate in the Labor and Employment Practice Group in the firm's Century City office. 

Mr. Campbell represents employers in all aspects of labor and employment litigation, including wage and hour violations, employment discrimination, sexual harassment, and wrongful termination in violation of public policy.  He has experience with both class action and single-plaintiff matters.

Areas of Practice

Mr. Campbell represents employers in all aspects of labor and employment litigation in defense of complaints about class action and single-plaintiff matters in both court and arbitration. He has successfully litigated and obtained a complete defense award in a multi-plaintiff arbitration, obtained summary judgment in court, as well as favorably resolved cases involving allegations of harassment, discrimination, retaliation, and wrongful termination. He also has experience with both class action and single-plaintiff wage and hour matters involving claims relating to overtime, meal periods and rest breaks, misclassification, inaccurate wage statements, and other derivative claims.

Mr. Campbell has successfully drafted and argued motions, including demurrers, discovery motions, and motions for summary judgment. He has also defended and taken depositions, prepared witnesses for deposition, and conducted witness interviews. He has experience with all aspects of civil litigation defense from case inception through arbitration.

Mr. Campbell represents employers in a variety of industries including financial services, banking, retail, healthcare, restaurant, manufacturing, and entertainment.