Time Clock Rounding Policies Could Lead to Legal Trouble

In a recent ruling, the U.S. Court of Appeals for the Eighth Circuit emphasized the potential pitfalls for employers relying on rounding policies under the Fair Labor Standards Act (FLSA). While FLSA regulations allow employers to round off employees' start and stop times for administrative convenience, this practice can expose employers to liability if not carefully managed.

Under the FLSA, employers are required to compensate non-exempt employees for all hours worked, including overtime for hours exceeding 40 in a week. To ensure compliance, employers must maintain accurate records of non-exempt employees' actual work hours. This can be achieved through automated timekeeping systems, such as time clocks. An FLSA regulation addresses this matter:

Historically, certain industries, particularly those using time clocks, have frequently rounded employees' start and stop times to the nearest 5 minutes or fractions of an hour. This practice is assumed to balance out, ensuring employees are fully compensated for their actual work hours. For enforcement purposes, this time calculation method is acceptable as long as it does not, over time, result in insufficient compensation for employees' actual work hours.

In the case of Houston v. Saint Luke’s Health System, Inc., the employer used an automated timekeeping system with a rounding policy. According to this policy, any clocked time within six minutes of a shift's scheduled start or end time was rounded to the scheduled time. An employee filed a lawsuit representing a group of colleagues with similar circumstances. Their argument was that this practice violated the FLSA by not adequately compensating employees for their actual work hours. At first, a federal district court dismissed the case, citing the employer's seemingly fair rounding policy, which was in line with FLSA regulations.

However, upon appeal, the Eighth Circuit discovered that despite its seemingly fair appearance, this policy actually resulted in employees being underpaid more frequently than overpaid, leading to an overall shortfall over time. The court did not definitively address whether an employer violates rounding regulations when it consistently undercompensates individual employees or only when it undercompensates employees collectively. Instead, the court determined that, in this case, both scenarios were at play due to the rounding policy.

This ruling serves as a cautionary tale for employers. Relying blindly on a rounding policy to meet FLSA requirements can be risky. FLSA regulations explicitly stipulate that such a policy must not lead to undercompensation over time. Consequently, employers with rounding policies should conduct periodic audits to verify that they maintain a neutral average in the long run. As the Eighth Circuit observed, with modern electronic timekeeping systems, accurately calculating work hours is straightforward compared to the older methods of punch cards and manual calculations. This raises the question of whether rounding policies are necessary at all in the current era.