California law requires employees to be paid for all hours worked. Some California businesses use a "rounding" system to determine the number of hours worked by their employees for payroll purposes. Last week, in AHMC Healthcare, Inc. v. Superior Court, the California Court of Appeal upheld a neutral payroll system that automatically rounds employee time up or down to the nearest quarter hour. BRG&S partner Jeffrey P. Fuchsman and senior counsel John J. Manier represent the employers in this case.

The case was brought as a class action by hourly employees at two AHMC hospitals, one in Anaheim and one in San Gabriel. The employees were required to clock in and out by swiping their ID badges at the beginning and end of their shifts, and before and after meal breaks.

The hospitals' payroll systems recorded the exact check-in and check-out times, but automatically rounded employees hours up or down to the nearest quarter hour (15 minutes) before calculating wages and issuing paychecks. For example, employees who clock in between 6:53 and 7:07 a.m. both are paid as if they had clocked in at 7:00 a.m. Meal breaks between 23 and 37 minutes are rounded to 30 minutes, but the system will not allow employees to clock in before the minimum 30 minutes required for meal periods under California law.

The plaintiffs claimed that this "rounding" system violated California law and resulted in their employers failing to pay wages owed, as well as various other wage and hour violations. Both sides asked the trial judge to decide the issue in their favor, but the judge rejected both requests.

However, the Court of Appeal overturned the trial judge's decision and ordered the judge to decide the "rounding" claim in favor of the employers. The court agreed with two earlier appellate decisions involving See's Candy Shops, and ruled that the employers' rounding system complies with California law because it is "fair and neutral and does not systematically undercompensate employees."

The plaintiffs relied on the fact that both of them personally lost a small amount of work time and compensation due to rounding. In addition, a slight majority of all hourly employees at the Anaheim hospital, and a minority of the San Gabriel workforce, lost work time and pay due to rounding. The other employees either gained work time and compensation, or were not affected either way.

However, the Court of Appeal was persuaded by the fact that the employers lost money due to rounding at both hospitals. Over a four-year period, employees were paid for thousands of hours more than the number of hours they worked, based on their clock in and clock out times. The court therefore concluded that the rounding system is not only "neutral on its face," but "also proved neutral in practice," and provided "a net economic benefit to employees viewed as a whole."

The court cautioned that a seemingly-neutral rounding system may be found to be illegal as applied to employees, especially if it is biased and "unfairly singles out certain employees." As an example, the court noted that "a system that in practice overcompensates lower paid employees at the expense of higher paid employees could unfairly benefit the employer." The court also discussed another case in which employees testified they were told to always round down their time, which raised a factual question "as to whether employees [were] ever allowed to round up."

In the AHMC case, however, there was "no evidence of a bias in the system or that the policy was applied differently to different employees." The court concluded that because "employees benefited overall from the rounding policy, the fact that a bare majority lost a minimal amount of time was not sufficient" for the plaintiffs to prove that the policy violated California law.

This decision is welcome news to California employers who use rounding policies for their payroll calculations. However, it is unclear whether the court in AHMC would have reached the same result if the employees were paid for fewer hours than shown on their time records, or if a significantly high percentage were underpaid. Unfortunately, an employer might not know the impact of its rounding policy unless it periodically audits clocked hours versus paid hours. By the time a lawsuit is filed, it might be too late, and the employer might be on the hook for a massive award of unpaid wages, penalties, and especially attorneys' fees.

Rounding policies are lawful in California  only if  they are both neutral on their face and do not result in employees being systematically underpaid for hours worked. Employers who are considering adopting a rounding policy should exercise caution and seek advice from labor and employment counsel.

If you have any questions about the matters discussed in this issue of Compliance Matters, please call your firm contact at (818) 508-3700, or visit us online at www.brgslaw.com. 

Sincerely,
John J. Manier
Jeffrey P. Fuchsman
Ballard Rosenberg Golper & Savitt