Electronic Time Rounding and Potential Unpaid Wages: Quantifying Net Differences in Nonexempt Employees’ Earnings and the Cost to Employers

Potential unpaid wages due to electronic time rounding (“ETR”) can significantly impact businesses and their nonexempt employees. This guide explains how ETR works, its financial impact, and the calculation of potential unpaid wages.

Key Takeaways

• Electronic Time Rounding often leads to potential unpaid wages because it creates a discrepancy between hours on the clock and hours paid.
• Employers can avoid electronic time rounding claims by (i) capturing time electronically down to the minute, and (ii) paying employees based on said recorded time.
• The net difference due to electronic time rounding can be evaluated using a number of measurements, e.g., by employee, by time increment, and/or in the aggregate.

Introduction

Electronic Time Rounding (“ETR”) historically has been a common practice in many workplaces. On its face, one might expect rounding to simplify the payroll process and have a neutral effect on employees’ wages. Intentional or not, ETR can lead to numerous consequences. When an employer’s electronic timekeeping system automatically rounds clock-in and clock-out times, it inherently leads to discrepancies between hours on the clock and hours paid. This ultimately can lead to allegations that include unpaid wages, statutory penalties, and legal costs.

Despite the ease of tracking time precisely and electronically, many employers continue to pay their employees based on rounded time (e.g., where each clock-in and clock-out time is rounded to the nearest quarter hour). Employers can avoid facing these claims by paying employees based on their recorded time.

Understanding Electronic Time Rounding

ETR generally entails three steps. First, employees clock in and out electronically, where the time punches are precise to the minute or second. Next, the electronic timekeeping system adjusts the actual clock-in and clock-out times to the nearest pre-determined increment, such as the nearest quarter hour or tenth of an hour. Lastly, the adjusted timestamps are used to calculate hours paid.

Consider the following hypothetical example of an employee who works two shifts, where the electronic timekeeping system automatically rounds each punch to the nearest quarter of an hour:

• Day 1: The employee clocks in at 6:53 AM and clocks out at 12:01 PM. This employee is on the clock for five hours and eight minutes and is paid for five hours.
• Day 2: The employee clocks in at 7:05 AM and clocks out at the end of a shift at 11:59 PM. Here, the employee is on the clock for four hours and 54 minutes, and the employee is paid for five hours.

Across these two shifts, there is a net difference of two minutes in favor of the employer. On average, there is a net difference of one minute per shift. While this may appear to be insignificant, these round-off errors across employees and shifts can grow into a large issue over time.

Consider an employer that has 100 workers per day and is open for business 300 days per year. Assume that the net difference between hours on the clock and hours paid is one minute per day, just as it is in the two-day example directly above. Over the course of a five-year period, employees in this hypothetical are not paid for 2,500 hours that were on the clock.¹

Why Are Employees More Likely to Experience Unpaid Wages Than Overpayments at Businesses Using Electronic Time Rounding?

Many employers understandably implement tardy policies to ensure that people are on time for their scheduled shifts. The presence of such a policy can lead to employees clocking in early more often than clocking in late at the beginning of their shift. If the employer utilizes ETR, this can result in fewer hours paid than hours on the clock in the long run. Together, these circumstances can lead to employees alleging that this unpaid time is compensable because they were expected to be at the work site before their scheduled shift start time.

Quantifying the Impact of Electronic Time Rounding on Nonexempt Employees’ Wages

Quantifying the impact of time rounding typically entails an analysis of historical timekeeping and payroll records. Broadly speaking, there are two commonly used formulas for measuring the net impact of ETR on employees’ earnings:

• Multiplying the applicable hourly rate of pay by the difference between unrounded and rounded time.

Example: Continuing with the example above where 100 employees have a total of 2,500 potential unpaid hours on the clock, suppose these employees have an average hourly rate of $25. Thus, the net difference in earnings is:

$25/hour x 2,500 hours = $62,500.

• Three steps: (i) multiplying the straight time rate of pay by the difference between unrounded and rounded straight time hours, and (ii) multiplying the overtime rate of pay by the difference between unrounded and rounded overtime hours, and (iii) adding (i) and (ii) together.

Example: Continuing with the example directly above, suppose that the 2,500 potential unpaid hours are comprised of 1,000 straight time hours and 1,500 overtime hours. Thus, the net difference in earnings is:

$25/hour x (1,000 straight time hours + 1.5 x 1,500 overtime hours) = $81,250.

The second method highlights the fact that ETR can have a greater impact on employers when overtime laws are taken into account. When this is considered, there can be a net loss (or gain) in earnings even when there is no net difference in hours. Consider the following circumstances in California, where nonexempt employees qualify for overtime when they work more than eight hours in a shift:

• Day 1: An employee is on the clock for 7.9 hours and ETR results in 8.0 hours paid
• Day 2: This same employee is on the clock for 8.1 hours and ETR results in 8.0 hours paid

Across these two days, there are 16.0 hours on the clock and 16.0 hours paid. However, ETR yields 16.0 straight time hours and no overtime hours, whereas this person was on the clock for 15.9 straight time hours and 0.1 overtime hours. If this employee’s hourly wage is $25, the net difference in terms of earnings is as follows:

[Expected earnings] $25/hour x (15.9 straight time hours + 1.5 x 0.1 overtime hours) – [Actual earnings] $25/hour x 16.0 straight time hours = $1.25 in potential unpaid wages.

Analyzing the Impact of Electronic Time Rounding

Below is a summary of the steps typically taken to evaluate the impact of ETR.

Data Collection

The first step in quantifying the impact of time rounding is to obtain historical timekeeping records along with any policy documents regarding time rounding. Together, these materials are used to assess the time rounding system, e.g., to the nearest 15 minutes, 10 minutes, or some other time increment. Along with this step, it is important to determine if rounding applies to all punches, or alternatively, specific punches such as shift start and end times only.

A review of payroll data can provide additional insights. For example, if an employee is claiming unpaid wages stemming from rounding to the nearest quarter hour, one would expect most pay stubs to show total hours paid ending in 0.25, 0.50, 0.75, or 0.00 hours.

The second step is to calculate net differences between rounded versus unrounded hours. Initially, this typically is conducted for each employee shift.

The third step is to sum the data across shifts. This can be done from a number of perspectives:

• • By employee pay period – This is informative in the sense that employees typically are paid on a weekly or bi-weekly basis
  • By employee – This is used to gauge the net impact for a given individual or set of individuals
  • By time interval, e.g., month – This can be used to gauge the magnitude of rounding over the course of a specified interval
  • Across employees – This sheds light on whether the net impact of time rounding was neutral in the aggregate

Once the data are organized in any of these formats, the practitioner can begin to perform a series of statistical analyses along with potential unpaid wages calculations.

Statistical Analysis

Statistical analysis in the context of a rounding analysis generally entails a combination of computations and graphical output. By analyzing large volumes of historical data, statisticians and economists can present a wide array of results. This includes but is not limited to the following:

• • Net differences in hours due to rounding
  • Net differences in earnings due to rounding
  • The percent of employees who clock in before shifts begin versus the percent of employees who clock in after shifts begin, e.g., at the top of the hour or 30 minutes into the hour
  • The percent of employees who were (i) at a disadvantage due to ETR, (ii) at an advantage due to ETR, or (iii) who were not impacted by ETR
  • Hypothesis tests addressing the probability that observed net losses (or gains) are statistically significant

Financial Impact Considerations

The financial impact of ETR can be substantial and extend well beyond the calculation of retroactive pay. Consider the following, which can vary by jurisdiction:

• • The statute of limitations can date back several years before the filing of a lawsuit
  • Pre-judgment interest on principal damages accrues until the day of the final disposition
  • Statutory/civil penalties can amount to thousands or even tens of thousands of dollars per employee
  • Liquidated damages can be equal to or even double the amount of retroactive pay
  • There is an up-front cost to mediate or litigate the case

The Role of Statisticians and Economists in Assessing the Impact of Electronic Time Rounding

Statisticians and economists play a vital role in analyzing the impact of ETR. With their computational resources and technical skills, they can (i) handle large and complex volumes of data, (ii) identify whether ETR is being used, and (iii) make a series of comparisons using a combination of timekeeping and payroll records. They also can perform a series of calculations measuring the impact that ETR has on employees’ earnings and on the business as a whole.

Summary

In conclusion, ETR can lead to significant unpaid wages, legal issues, and financial losses for both employees and employers. Employers can avoid these problems by paying their workers based on actual clock-in/out times, not systematically adjusted clock-in/out times.²

Frequently Asked Questions

What is Electronic Time Rounding (“ETR”)?

ETR refers to the practice of adjusting hours on the clock for purposes of determining hours paid.

How can ETR lead to extensive unpaid wages?

The combination of a tardy policy and automatic adjustments to the timestamps can yield a skewed distribution of the net difference in hours and/or the net difference in earnings.

How are alleged unpaid wages stemming from ETR calculated?

Broadly speaking, alleged unpaid wages can be calculated in two ways. One approach is to multiply the applicable rate of pay by the difference between rounded and unrounded time. The other approach is to (i) multiply the straight time rate of pay by the difference between unrounded and rounded straight time hours, and (ii) multiply the overtime rate of pay by the difference between unrounded and rounded overtime hours, and (iii) add (i) and (ii) together.

What is the total potential cost associated with unpaid wages due to ETR?

Measurable costs associated with ETR can include (i) retroactive pay, (ii) pre-judgment interest, (iii) statutory/civil penalties, (iv) liquidated damages, and/or (v) legal costs. These amounts and the statutes of limitation can vary from state to state.

How can employers reduce the likelihood of potential unpaid wages?

Employers who pay employees based on actual time on the clock almost surely will not face allegations that their workers suffered unpaid wages due to rounding.