March 8, 2013
The California Supreme Court made a quiet but important statement this term by recently refusing to hear an employee’s challenge to the common practice among employers of rounding time entries. See’s Candy Shops, Inc. v. Superior Court, 210 Cal. App. 4th 889 (Cal. Ct. App. 2012), review denied (Feb. 13, 2013). In doing so, the Court has allowed an important Court of Appeal decision to stand–one that, for the first time, expressly permits employers to round time entries, provided that the employer’s rounding policy is "fair and neutral on its face" and will properly compensate employees for all time actually worked over a period of time. Id. at 907. The Court of Appeal decision, and the California Supreme Court’s refusal to overrule that decision, serves to remove much of the legal uncertainty that had existed about the permissibility of this practice in California, and brings California in line with federal law on this important subject.
The Long-Standing Federal Policy on "Rounding"
Nearly fifty years ago, the United States Department of Labor adopted a regulation under the Fair Labor Standards Act ("FLSA") permitting employers to round time entries provided that rounding "is used in such a manner that it will not result, over a period of time, in failure to compensate the employees properly for all the time they have actually worked." 29 C.F.R. § 785.48(b). Federal law therefore permits the use of a rounding policy as long as it "on average, favors neither overpayment nor underpayment." Alonzo v. Maximus, Inc., 832 F. Supp. 2d 1122, 1126 (C.D. Cal. 2011).
While federal law has long permitted employers to use rounding policies, the issue has remained unsettled in California. Prior to See’s Candy Shops, there had been no statute or reported California decision addressing the legality of rounding. And although the California Division of Labor Standards Enforcement ("DLSE") has followed federal law in this regard (see DLSE Enforcement Polices and Interpretations Manual §§ 47.1, 47.2), the agency’s enforcement position has never been binding on the courts, nor had any court expressly endorsed the DLSE’s approach.
The Court of Appeal’s Decision in See’s Candy Shops
In See’s Candy Shops, the trial court certified a class action to determine whether class members suffered a loss of compensation when the employer used a rounding policy where time entries were rounded up or down to the nearest tenth of an hour. See’s Candy Shops, 210 Cal. App. 4th at 892. The employer argued, through an affirmative defense, that its policy of rounding time entries to the nearest tenth was consistent with federal and state law, but the trial court rejected the employer’s "rounding" defense on summary judgment, concluding that defense was inconsistent with California law. Id. at 893, 899.
The Court of Appeal initially refused to hear the employer’s appeal, but in January 2012, the California Supreme Court showed interest in the topic by directing the Court of Appeal to consider the matter. In doing so, the Court of Appeal reversed the trial court decision, stating that in the absence of controlling or conflicting California law, California courts generally look to federal regulations under the FLSA for guidance, and that the policies underlying the federal regulations with regard to rounding apply equally in California. Id. at 903. The court held that as long as a rounding policy is neutral, "the practice is proper under California law because its net effect is to permit employers to efficiently calculate hours worked without imposing any burden on employees." Id.
The Court of Appeal rejected the employee’s argument that Labor Code section 204–which says that "[a]ll wages . . . are due and payable twice during each calendar month"–only permits rounding if employers engage in a "mini actuarial process at the time of payroll" and "reconcile the rounding with actual time punches every two weeks." Id. at 904. Instead, it held that section 204 only requires an employer to maintain two regular pay dates; it does not address the manner in which the employer calculates the amount of wages the employee is owed. Id. Furthermore, the Court of Appeal reasoned that the argument that rounding could be consistent with federal law but inconsistent with California law because of California’s twice-monthly pay requirement ignores the fact that federal law also requires the prompt payment of wages. Id. at 905 (citing Rogers v. City of Troy, 148 F.3d 52, 55 (2d. Cir. 1998)).
Thus, relying on the federal standard, the court held that "the rule in California is that an employer is entitled to use the nearest-tenth rounding policy if the rounding policy is fair and neutral on its face and ‘it is used in such a manner that it will not result, over a period of time, in failure to compensate the employees properly for all the time they have actually worked.’" Id. at 907 (quoting 29 C.F.R. § 785.48).
Following the Court of Appeal decision, the employee asked the California Supreme Court to consider the matter, but on February 13, 2013, the Supreme Court denied the employee’s petition to review. In allowing the Court of Appeals decision to stand, the Supreme Court also rejected the employee’s request to depublish the decision.
Rounding Considerations in the Wake of See’s Candy Shops
Although See’s Candy Shops provides much-needed certainty in California, and is an important victory for employers, it is important to note that the Court of Appeal did not find that the employer’s rounding policy was automatically lawful. Rather, the court simply concluded that See’s Candy should be permitted to make a showing at trial that its rounding policy was "both mathematically and empirically unbiased[.]" Id. at 908, 913. As a result, in the wake of See’s Candy Shops, employers should take care to ensure that any rounding policy is neutral in design and that it properly compensates employees for their time worked over a period of time. It remains to be seen how courts will apply See’s Candy Shops in practice, but it is likely that the lawfulness of rounding policies will largely depend on how such policies actually operate in practice, taking into account the specific schedules and employment policies at issue in any given case.
Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you work, or any of the following members of the firm’s Labor and Employment Practice Group:
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Scott A. Kruse – Los Angeles (213-229-7970, email@example.com)
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