On July 1, 2019, the Wage and Hour Division of the U.S. Department of Labor issued several new opinion letters. One such letter, FLSA 2019-9, concerns an employer’s use of payroll software to calculate the wages owed to its employees each pay period. The question addressed by the DOL is whether that payroll software, which utilizes a formula for rounding off employee clock-in and clock-out times, properly compensated the employees for all work hours in compliance with the Fair Labor Standards Act (FLSA).
Of course, the FLSA requires that non-exempt employee be paid for all hours worked in a workweek. The employer must therefore have a timekeeping system which accurately counts and tracks such work hours. DOL regulations recognize that it is common and acceptable for employers to “round” clock-in and clock-out times. The DOL’s long standing policy has been to accept rounding to the nearest five minutes, one-tenth of an hour, one-fourth of an hour, or one-half hour. However, such rounding is permissible only if, over a period of time, such rounding averages out so that employees are compensated for all the time they actually work. See 29 C.F.R. §785.48(b). In other words, an employer may violate the FLSA minimum wage and overtime pay requirements if the employer always rounds down.
In the case considered by the DOL in its opinion letter, an employer used computer-based payroll software to convert the employee clock-in and clock-out times each work day to a numerical figure extended to six decimal points. For example, 7 hours and 30 minutes of reported work time converted to 7.500000 hours. The payroll software then rounds that number to two decimal points. If the third decimal is less than .005, the second decimal stays the same; but if the third decimal is .005 or greater, the second decimal rounds up by .01. The software then calculates wages for that pay period by multiplying the rounded daily hours number by the employees’ pay rate.
Applying the legal standards set forth in 29 C.F.R. §785.48, the DOL concluded that the foregoing rounding practice is permissible under the FLSA. Under its two-pronged analysis, the DOL first determined that the rounding practice “is neutral on its face” (i.e., that the rounding practice does not overtly reflect an intent to underpay an employee for hours worked). Secondly, the DOL found that the employer’s rounding practice “appears to average out so that it fully pays its employees for all of the time that they actually work.” Thus, the rounding practice complied with 29 C.F.R. §785.48(b).
Given that so many employers are now using payroll software to calculate their employees’ wages, the DOL’s opinion letter offers timely and instructive guidance. To the extent that such payroll software incorporates a formula for rounding employee clock-in and clock-out work time, employers must be mindful of their obligation to ensure that such rounding (when averaged over at least several pay periods) fully compensates employees for all of the time they have actually worked. Failure to do so can result in liability for back wages, including overtime premiums, for a period of two years (or, in the event of a willful violation, three years). When in doubt regarding timekeeping practices, employers should consult with their employment counsel for advice.