For the past decade, many California employers have lawfully used neutral rounding systems to compensate employees. Rounding is the practice of adjusting an employees’ recorded time worked to the nearest preset increment for compensation purposes. (For example, a policy that rounds time to the nearest sixth of an hour would adjust an 8:05 am time punch to 8:00 am and an 8:06 am time punch to 8:10 am) Under a rounding system, employers compensate employees based on their rounded time instead of actual hours worked. Historically, employers used rounding to ease the administrative burden of manually calculating payroll (most would agree that manually calculating hourly compensation based on five, 5.5 or 5.75 hours of work is easier than doing so based on five hours and one minute of work or five hours and 33 minutes of work and so on).

Under the California Court of Appeal’s 2012 decision in See’s Candy Shops, Inc. v. Superior Court, its progeny and related federal cases, rounding policies are lawful under both California and federal law if they are neutral facially and as applied. A policy is facially neutral if it allows time punches to be adjusted both up and down. A policy is neutral as applied when rounding does not, on average, undercompensate employees in the aggregate over time. While rounding has long been an acceptable timekeeping practice under state and federal law, the California Supreme Court recently hinted this may not be the case for much longer.

IN DEPTH

On February 25, 2021, in Donohue v. AMN Services, LLC, the California Supreme Court held that employers may not apply their rounding practices to meal period start and end times. While it was unsurprising that the Court found rounding to be incompatible with California’s extremely technical meal break provisions, the issue of rounding (in any context) had not yet been addressed by the high court. After discussing the legal landscape and historical development of rounding in general, the Court expressly limited its holding to meal periods and refused to opine on whether rounding shift times under See’s Candy and its progeny is permissible. At first glance, it appears the Supreme Court is blessing rounding (and indeed See’s Candy remains undisturbed by Donohue except in the meal break context). Looking deeper, however, one could view Donohue as the Court’s signaling that the historical justifications for shift rounding are becoming obsolete—if not already—and that if the Court were to address rounding in the near future, it would find it to be an unlawful, outdated practice.

Specifically, the Court noted that the practical advantages of rounding policies have diminished over the years and may diminish further as technology continues to evolve. Certainly, today, many employers use electronic timekeeping and payroll systems that can record actual time. This raises the question: What need is there to ease the administrative burden of manual payroll calculations when technology renders manual calculations obsolete?

More importantly, the Court’s holding in Donohue makes it more difficult for employers to justify rounding shift times altogether. For example, AMN used an electronic timekeeping system that “could have [tracked] meal periods using [the] unrounded time punches instead of rounding the punches to the nearest 10-minute increment.” Since AMN’s technology was capable of using employee’s actual meal period times instead of rounded times, the Court expressly denounced AMN’s decision to round, “As Donohue observes, [AMN’s system] actually had to take the extra step of converting the unrounded time punches to rounded ones; it is not clear what efficiencies were gained from this practice.”

Donohue indicates that, in the years to come, with greater and more affordable access to electronic timekeeping and payroll systems, employers will be hard pressed to explain how rounding shift times continues to serve a legitimate purpose under California law. Indeed, little benefit remains in being allowed to round shift times but not meal period times, because such practice would result in employers needing to calculate employee compensation down to the minute.

More problematic is that the historical benefits of rounding are outweighed by class certification risks. Rounding policies are susceptible to class treatment because whether a particular rounding policy is lawful (i.e., neutral facially and as applied) is often a common legal question appropriate for classwide resolution. Unfortunately, class certification often provides plaintiffs with significant settlement leverage, regardless of the merits of the underlying claim. This is because classwide exposure for unpaid wages (and derivative penalties) is often millions of dollars because of the number of class members who worked during the three-year statute of limitation period for unpaid wages (or four years when brought with a Business and Professions Code § 17200 claim).

To avoid class action risks and minimize unpaid wage (and derivative claim) liability, employers with rounding practices should consider phasing them out—before the California Supreme Court decides rounding has overstayed its welcome.