Be Careful – A Time Clock Rounding Policy Can Result in FLSA Liability!

Although the Fair Labor Standards Act regulations permit employers to round off employees’ start and stop times for administrative ease, this process may still result in liability for employers, as the U.S. Court of Appeals for the Eighth Circuit recently held.

The FLSA requires employers to pay non-exempt employees for all time worked, and for overtime when the employees work more than 40 hours in a week. Employers must therefore keep accurate records of the actual time worked by non-exempt employees. This can be accomplished through automated timekeeping systems, like time clocks. An FLSA regulation provides as follows:

It has been found that in some industries, particularly where time clocks are used, there has been the practice for many years of recording the employees’ starting time and stopping time to the nearest 5 minutes, or to the nearest one-tenth or quarter of an hour. Presumably, this arrangement averages out so that the employees are fully compensated for all the time they actually work. For enforcement purposes this practice of computing working time will be accepted, provided that it 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 Houston v. Saint Luke’s Health System, Inc., the employer used an automated timekeeping system that applied a rounding policy, such that an employee’s clocked time within six minutes of a shift’s scheduled start or end time was rounded to the scheduled time. An employee brought suit on behalf of a class of similarly situated employees alleging that this practice violated the FLSA by failing to fully compensate employees for time worked. The federal district court dismissed the case on the basis that the employer had a facially neutral rounding policy, as permitted under the FLSA regulation.

On appeal, however, the Eighth Circuit found that, although facially neutral, in practice the policy resulted in employees being underpaid more than they were overpaid – and thus the payments did not average out in the long run. The Eighth Circuit declined to resolve whether an employer violates the rounding regulations when it undercompensates any individual employee over time, or only when it undercompensates employees as a whole – instead finding that, here, the rounding policy did both.

What this means is that employers should not blindly rely on a rounding policy for compliance with the FLSA. The regulation itself provides that such a policy cannot result in undercompensation over time. Thus, employers with such policies should regularly audit the application of the policy to confirm that they are in fact achieving a neutral average over time. Moreover, as the Eighth Circuit noted, in this day and age of electronic timekeeping systems, it is quite simple to calculate the exact amount of time worked – unlike “the old days of punch cards and hand arithmetic.” That begs the question of whether rounding policies should be used at all.