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Rounding Error: Eighth Circuit Invalidates Longstanding Rule on Timekeeping

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The Fair Labor Standards Act (FLSA) is more than 80 years old, a legacy of the bricks-and-mortar, pencil-and-paper era.  One wouldn't expect it to hold many surprises.  But in Houston v. St. Luke's Health Systems, 75 F.4th 1175 (8th Cir. 2023), the U.S. Court of Appeals for the Eighth Circuit invalidated a longstanding regulation condoning rounding, 29 C.F.R. § 785.48(b), because the rule, though facially-neutral, was determined to be not so even-handed in application, but rather to benefit the employer two times out of three.

The hospital employee plaintiffs in Houston brought a collective action alleging that they had been underpaid over several years due to the employer's timekeeping policy that rounded off time at the beginning and end of shifts. Employees clocked in at the beginning of their shifts and clocked out at the end, using an automated timekeeping system.  The employer then applied a rounding policy: clocked times within six minutes of a shift's scheduled start or end get rounded to the next quarter hour for calculating compensation. For example, an employee who clocked in at 8:56 a.m. for a 9:00 a.m. shift would not 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 still be paid for those unworked six minutes.  

Rounding systems were commonplace when the FLSA was enacted, for practical reasons:  it was enough of a headache to figure quarter-hours of pay, but to do calculations on a minute-by-minute basis would have been maddening.  The FLSA regulations provided that as long as the system was facially neutral and fairly applied, it was okay: the assumption was that unpaid minutes would be canceled out by roughly equivalent overpayments.  

Sounds fair, right?  Well, as they say, the devil is in the details. In Houston expert witnesses for both parties studied the rule as applied, analyzing time and pay records for thousands of employees.  And both experts concluded that the rounding rule benefitted the employer two-thirds of the time, shortchanging the employees.  Still, the District Court granted the employer's motion for summary judgment, finding that the rounding policy was facially neutral and did not violate the FLSA, even if there was an adverse impact on the employees over time.

The Eighth Circuit disagreed, and vacated the order for summary judgment:

No matter how one slices the data, most employees and the employees as a whole fared worse under the rounding policy than had they been paid according to their exact time worked. Thus, we need not resolve whether an employer runs afoul of the rounding regulation whenever it under compensates any individual employees over a period of time or only when it under compensates employees as a whole, including those who were overcompensated or neutrally compensated. Here, the rounding policy did both. It resulted in lost time for nearly two thirds of employees, and those employees lost more time than was gained by their coworkers who benefitted from rounding.   

The employer argued that this result would upend decades of practice and outlaw a practice - rounding - that had been explicitly approved in the regulations.  The Court was unmoved, citing the FLSA's overarching principle of requiring pay for all hours (and minutes) worked, and noting that computerized time and pay systems made a rounding policy unnecessary.  

Why this statistical anomaly?  The Court of Appeals didn't reach that question.  The explanation probably lies in human nature, and most folks' tendency to arrive late and leave early (rather than the other way around).  One would think, as the framers of the regulation plainly assumed, that such variations would even out over time.  Apparently not.

Bottom line:  The sun may have set on the practice of rounding pay to the nearest quarter-hour.  Automation has made such old-fashioned shortcuts obsolete - and dangerous.  For workers paid on an hourly basis using time clocks or badge scans, the better practice today is to account - and pay for - every minute actually worked.

This article is part of our February 2024 Newsletter. 

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