Permissible Payroll Rounding Practices
The U.S. Department of Labor (DOL) recently issued an opinion letter addressing permissible rounding practices for calculating an employee’s hours worked. In the letter, a government contractor, who is subject to the Service Contract Act (SCA), uses payroll software to calculate wages based on recorded time entries. The software rounds each employee’s daily hours worked in a neutral manner.
The DOL noted that SCA regulations instructs contractors use Fair Labor Standards Act (FLSA) principles to calculate hours worked. According to the DOL, it’s acceptable to round to the nearest five minutes, one-tenth of an hour, one-quarter of an hour or one-half hour as long as the rounding averages out so employees are compensated for all hours worked.
In the scenario described in the opinion letter, when an employee clocks in and out for each work period using a time clock or computer, the contractor’s payroll software goes through a multi-step rounding process:
- First, the payroll software converts the amount of time an employee records working in each work period into a number figure in decimal form extended out to six decimal points. For example, 7 hours and 30 minutes converts to 7.500000.
- The payroll software then totals the converted hours (extended to six decimal points) for each work period on each working day to calculate a numerical figure for daily hours, which is also extended out to six decimal points.
- Next, that number is rounded to two decimal points. If the third decimal is less than .005, the second decimal stays the same (e.g., 6.784999 hours worked rounds down to 6.78 hours); but if the third decimal is .005 or greater, the second decimal rounds up by 0.01 (e.g., 6.865000 hours worked in a workday rounds up to 6.87 hours).
- Finally, the software calculates daily pay by multiplying the rounded daily hours number by the prevailing wage under the SCA.
Based on the facts provided, the DOL concluded that this particular employer’s method of calculating hours worked does comply with FLSA regulations and is compliant under the SCA.
California law requires that rounding policies be fair and neutral on their face and in practice, which means the policy can’t fail to pay employees for all the hours they work.
California courts upheld policies that round to the nearest tenth of an hour increment (See’s Candy Shops, Inc. v. Superior Court, 210 Cal. App. 4th 889 (2012)), or quarter-hour increment (AHMC Healthcare, Inc. v. Superior Court of Los Angeles County, 24 Cal.App.5th 1014 (2018)). A federal court interpreting California law also upheld a quarter-hour rounding policy (Corbin v. Time Warner Entertainment-Advance/Newhouse Partnership, 821 F.3d 1069 (9th Cir. 2016)).
Employers who engage in rounding practices should carefully examine their policies and practices to ensure they’re fair and neutral and audit their rounding practices regularly to confirm that employees aren’t undercompensated for the time they worked.
Consult legal counsel about whether your rounding policies and practices comply with California law.