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December 12, 2023
If You Have Time Clocks, Be Wary of Overtime Lost Over Time

by Steve Jones

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Employers using time clocks frequently round time to the nearest quarter or tenth of an hour. This is permissible as long as it averages out that the time rounded down is offset by the time rounded up. However, the U.S. Court of Appeals for the 8th Circuit (which covers employers in Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota) recently ruled that if the time rounded doesn’t average out, then the employer is underpaying employees in violation of the Fair Labor Standards Act (FLSA).

Synopsis

Hourly employees of St. Luke’s Health System allege they were underpaid over several years because of their employer’s timekeeping policy, which rounded off time at the beginning and end of shifts.

The district court dismissed the case without a trial in favor of St. Luke’s on all claims. On appeal, the 8th Circuit vacated the district court’s ruling and sent the case back to the district court for reconsideration.

Background

St. Luke’s used an automated timekeeping system under which employees clocked in and out at the beginning and end of their shifts, and the system recorded the exact time. The system then applied a rounding policy. Clocked times within six minutes (one-tenth of an hour) of a shift’s scheduled start or end were rounded to the scheduled time for compensation purposes.

For example, an employee who clocked in at 8:56 a.m. for a 9:00 a.m. shift would be treated as having clocked in at the scheduled time of 9:00 a.m. and wouldn’t be paid for those four minutes. Likewise, an employee who clocked out early at 4:54 p.m. for a shift ending at 5:00 p.m. would be treated as having clocked out at 5:00 p.m. and would be paid for those unworked six minutes.

Torri Houston, a former employee, filed a collective action on behalf of herself and similarly situated employees claiming St. Luke’s violated the FLSA’s overtime provisions by failing to fully compensate employees for work performed because the rounding policy, when averaged over time, consistently resulted in employees as a group being underpaid.

Each side submitted expert reports analyzing the rounding policy’s effect on compensation. The employees’ expert, Scott Baggett, analyzed pay records across six years of data on a per-shift basis, a per-workweek basis, a per-employee basis, and overall. St. Luke’s expert, Deborah Foster, also analyzed pay records on a per-shift and per-employee basis but did so separately for three lookback periods.

The parties agreed, however, that any minor differences in the data or in the conclusions reached by the reports were immaterial.

The reports showed that the rounding policy consistently benefited the employer. Baggett reviewed more than 7 million shifts of 13,000 employees and determined the rounding policy cut time from about half of shifts, added time to a little over a third, and had no effect on the rest. The net loss to employees increased steadily over time. On a per-employee basis, Bagget concluded the policy cut time for nearly two-thirds of employees and added time for only a third.

Overall, he estimated the policy favored St. Luke’s to the tune of 74,000 employee hours over the six years of payroll data he analyzed and estimated about $140,000 in lost overtime pay for the two-year FLSA collective period.

Foster’s report tracked Baggett’s. She found that over the three lookback periods she analyzed, about half of employees had time cut, but only a third had offsetting time added. On average, those employees lost 6.5 hours in the first lookback, 8.5 hours in the second lookback, and 11.5 hours in the third lookback.

On a per-shift basis, any time lost was small because the rounding policy only operated within a six-minute window, but over time, the amount lost was more significant because of the consistent pattern of losing more time than gained by rounding.

The district court dismissed the trial in favor of St. Luke’s, concluding the rounding policy was neutral as applied because:

  • The time lost per shift wasn’t that much.
  • Even if more employees lost time than gained, the rounding policy both added and subtracted time during the period, meaning other time periods might show different results.
  • On a per-shift basis, the rounding policy took time from about half of shifts but added to or left neutral the other half.

Houston then appealed to the 8th Circuit.

Full Compensation Required, Rounding Merely Permitted

On appeal, the 8th Circuit focused on the FLSA’s language, which, as its primary feature, requires that employees be paid for all hours worked. The court acknowledged that FLSA regulations permit a rounding policy and that St. Luke’s policy was neutral on its face. However, it determined that the overriding principle is that employees be paid for all hours worked, and under these facts, the consistent underpayment meant that employees as a group weren’t being paid for all hours worked when reviewed over time.

The 8th Circuit emphasized that the “rounding regulation does not require rounding; it permits it. That permission comes with conditions: chiefly, that the rounding ‘will not result’ in systematic or routine underpayment ‘over a period of time’ for work performed.”

Accordingly, it vacated the district court’s dismissal and sent the case back for trial.

Bottom Line

First and foremost, if you’re using rounding in your wage calculations, you need to check its impact over time on employees’ wages. If there’s a consistent pattern of saving your company money, then you need to consider corrective action, or you need to consider whether the early clock-in time was actually work performed or time spent by employees for their benefit and not the company’s.

In this case, the 8th Circuit noted the parties had stipulated that the variance was all time worked, so it wasn’t an issue. However, you could develop evidence by survey or observation that employees use this time for personal purposes, such as getting a cup of coffee or visiting with coworkers before starting work. If the time is noncompensable, then there’s no obligation to pay for it.

Steve Jones is an attorney with Jack Nelson Jones, P.A., in Little Rock, Arkansas, where he focuses his practice on labor and employment law and business litigation. He has served as Managing Partner and is presently Secretary and Vice-President for the firm. You can reach him at sjones@jacknelsonjones.com.

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