Back in the day when handling payroll was pretty much a pen-and-paper process, employers would use rounding to account for odd minutes and seconds outside the regular work schedule. Time clock rounding helped streamline calculating wages and save chunks of time in the process.
But does it still make sense today?
What Is Time Clock Rounding?
Under the Fair Labor Standards Act (FLSA), all employers are required to track and store employee time records completely and accurately. This can be done either by asking employees to write their hours down, using regular time clocks or through time-tracking software.
“So, what does time clock rounding mean?”
In a nutshell, time clock rounding means that the actual work hours of your nonexempt employees are rounded up or down by set increments. Depending on the type of your business and general industry practices, you can round work hours in 5-minute and 15-minute increments or to 1/10th of an hour (more on that in a moment).
These days, thanks to GPS-enabled time tracking and payroll automation, fishing for small deviations from regular clock-ins and clock-outs has become much easier. And yet, some small-business owners still use rounding to calculate their employees’ wages.
Is Time Clock Rounding Legal?
The short answer is: Yes. The Department of Labor (DOL) allows employers to round time up or down within 15-minute increments, but there’s a catch. This method can’t be used as a means of cutting labor costs or favor the employer in any way.
Here are a few things to keep in mind when rounding work hours:
- If you choose to round to 15-minute increments, you need to observe the 7-minute rule; for every 1 to 7 minutes that are rounded down, there is a corresponding timeframe of 8 to 14 minutes that are rounded up to the nearest quarter-hour and counted towards total work time
- Time clock rounding should be performed in a way that doesn’t favor the employer but rather “averages out so that the employees are fully compensated for all the time they actually work”. If it’s impossible to ensure a “neutral” outcome, rounding should favor the employee
- The maximum rounding increment allowed by FLSA is 15 minutes so anything greater than that exposes your business to potential legal trouble
- Regardless of the rounding method, you must still observe the minimum wage and overtime requirements to stay compliant. You can read more here
- When you round employee work hours, it’s key to maintain accurate and complete records. Some of the information you need to store include total employees’ time worked each day and week, overtime earnings and wages paid each pay period
- Finally, although rounding is legal under the FLSA, you may want to refer to state regulations first and see if they don’t overrule the federal law
3 Common Rounding Rules
There are several rounding methods that are generally compliant with the FLSA and DOL requirements. While they all work in a similar way, each may be suitable for a different type of business.
15-Minute Rounding (1/4th of an hour)
Rounding to 15 minutes (or 1/4 hour) observes two thresholds that indicate whether the clock-ins and clock-outs are rounded up or down; The first 7.5 minutes is always rounded down while the second-half 7.5 minutes are rounded up to a full quarter of an hour
Here’s an example:
Similarly to the previous method, 5-minute rounding splits every 5 minutes into two parts of 2.5 minutes. Whenever your employee clocks-in or out in the first 2.5 minutes of that timeframe, time is rounded down. If an employee punches their card in the other half, the time is rounded up to the nearest 5 minutes.
Rounding to 1/10th of an Hour (6 minutes)
Finally, rounding to 1/10th of an hour uses 6-minute increments (6×10), each split into 3-minute intervals. For every three minutes after each the 6-minute increment, time is rounded down. Conversely, the second half of the interval rounds up to the nearest 6 minutes. It’s that simple.
3 Risks of Time Clock Rounding
Now that you know how time clock rounding works, the big question that remains is: “should I do it?” Would your current payroll process really benefit from this approach?
If you still want to give it a try, you should be aware of some of the risks that come with the package.Employer-Employee Friction
It’s no secret that employees are not particularly fond of time clock rounding. Sometimes, business owners are not transparent enough about it or don’t educate the workforce on how it affects wages. In more grim scenarios, employers use rounding as an easy way to pocket some extra cash, which is considered wage theft.
If the grievance builds up over time, a dissatisfied employee may take legal action. Considering that DOL is rather strict about the “fairness” of recording work hours, the dispute can turn into a full-blown lawsuit and lead to further investigation into your payroll practices.
Before you implement time clock rounding at your small business, it’s important that you first discuss it with your employees. Want to keep them from clocking in late or clocking out early? Can’t enforce signing time cards? Try voicing your concerns and mediate the issue before it escalates.
Inaccuracies in Employee Records
The popular argument for using rounding is that it makes handling payroll a tad easier. But does it really? Shaving down a minute here and there can lead to small anomalies popping up all over. And once they stack up, it’s impossible to keep your records accurate.
For some business owners, work hours are also one of the KPIs that help measure the performance of their business. With these numbers askew, you won’t be able to see the big picture and plan strategically because of the flawed data.
Remember that tracking hours and calculating wages don’t have to be that difficult. You just need the right set of tools to do so quickly and accurately.
Overpaying or Underpaying Employees
In the ideal world, time clock rounding balances out (as required by DOL and FLSA) for the employer and employee. But this is rarely the case.
Most of the time, it’s either the employer OR the employee that reaps the benefits. If it’s the latter, you’re most likely miscalculating wages and overpaying your workers. If the former, your risk running into grievance complaints and costly legal trouble.
Regardless of which is true for your small business, the potential benefits of rounding are simply not worth it. When you “adjust” work hours to save time and money, the risk of underpaying or overpaying your workforce defeats the purpose of rounding at the onset.
Let’s Wrap It Up
Many small-business owners still use rounding to reclaim a portion of the time and money that escapes due to inaccurate time-tracking methods. Is it justifiable? With the potential risks and questionable gains on the scale, it may be better to look for an alternative solution.