7 minute rule for payroll - woman placing shoes on a rack

7 minute rule for payroll

Saturday, December 20, 2014

The Department of Labor (DOL) oversees the Fair Labor Standards Act (FLSA), which is a federal law enacted in 1938 that created the Wage & Hour Division. Since then, the act has gone through multiple amendments, and its scope of jurisdiction has grown significantly. Today, the division covers FLSA, government contract labor standards, migrant and seasonal workers, employee polygraph protection, the Family and Medical Leave Act (FMLA), and immigration.

As part of its charter, the Wage & Hour Division instituted the 7-minute rule to ensure employees were compensated for their work hours. The rule provides instructions on calculating an employee's time in 15-minute increments for payroll purposes. It provides a standard that ensures that each employee is fairly compensated regardless of where they work.

What is the 7-minute rule?

The 7-minute rule is about rounding time to the nearest 15-minute interval. Dividing an hour into quarters results in four 15-minute increments, starting at the top of the hour. For example, 8:00, 8:15, 8:30, 8:45, etc.

If an employee clocks in or out within the first 7 minutes of a 15-minute interval, the employer can round the time down to the nearest quarter hour. If the employee clocks in or out from minutes 8 to 14 of the 15-minute interval, the employer can round the time up to the next quarter hour.

Let’s look at an example. Suppose an employer offers one 30 minute meal break and two 15-minute breaks for an hour of non-working time during a workday that starts at 8:00 a.m. and ends at 5:00 p.m. If an employee clocks in at 8:04 a.m., the employer can round down the time to 8:00 a.m. If an employee clocks in at 8:09 a.m., the employer can round the time up to 8:15 a.m. 

Let's look at some different examples to see how the 7-minute rule can impact a company's payroll.

Sally's 40-hour work week

Sally clocks in at 8:00 a.m. and clocks out at 5:00 p.m. Monday through Thursday. On Friday, she arrives 11 minutes late but works until 5:10 p.m. Rounding Friday's time would show that she arrived at 8:15 and left at 5:15 for a full eight-hour day. Without rounding, Sally was a minute short of working 40 hours. 

Sam's 40-hour work week

Sam clocks in at 8:05 a.m. Monday through Wednesday but leaves at 5:00 p.m. each day. Sam arrives at 8:00 a.m. on Thursday and Friday but doesn't clock out until 5:10 p.m. Using rounding to calculate Sam's wages, the company would round the 8:05 a.m. arrivals down to 8:00 a.m., indicating that Sam worked eight hours for Monday through Wednesday. For the two days that Sam stayed late, the company would round his time up to 5:15 p.m., indicating he worked 30-minutes beyond his 40-hour work week. Sam is paid for 40.5 hours of work, even though he only worked an extra 5 minutes. 

Sarah's 40-hour work week

Sarah clocks in at 8:08 a.m. Monday through Friday and clocks out at 5:00 p.m. each day. Sarah's start time would be 8:15 a.m. with rounding, leaving her with a 7.45-hour workday. In fact, Sarah worked 35 minutes she was not paid for. This rounding violates the FLSA, and the employer could be subject to fines should the employee decide to file a claim for unpaid wages. The reason for this is that as part of FLSA, employers must pay for every minute worked, regardless of the method used to determine the hours worked.

Should your business use the 7-minute rule?

Rounding certainly made time calculations simpler in the 1940s when time clocks were used. However, with today's technology, rounding isn't necessary. In fact, rounding can hurt your bottom line and could put you and your small business in legal complications. Here’s why:

Overpaying employees

Sam's example illustrates overpaid employees. Suppose Sam earns $30.00 per hour and continues turning in a time card that shows 40.5 hours. The 0.5 hour adds another $15.00 to his pay period. At the end of 52 weeks, Sam has been paid close to $800.00 for work he didn't do. Multiply that by a few employees and an employer is looking at thousands of dollars worth of pay for work not performed. Overpaying employees can hurt the bottom line, but it does not violate labor laws.

Underpaying employees

Even if an employer follows the rounding rules, underpaying employees can result in legal complications. The employer must always round in favor of the employee, especially if the rounding impacts overtime pay. The government frowns on employers who appear to be rounding to avoid paying overtime.

FLSA violations can result in a $2,000 fine per employee. Employees can also file a complaint with the Department of Labor to receive unpaid compensation. Neither option is good for a small business.

Key performance indicators

Some companies use timesheets to determine key performance indicators (KPIs). By using the rounding method, they are receiving an approximation of what individuals are contributing. It can skew the data when trying to determine output based on time. There's no need for guesswork when there are systems in place to help companies record employee hours.

Payroll software

Payroll software includes a time-tracking element that allows for precise calculations of KPIs. The technology can manage employees' timesheets, so no rounding is required.

Offloading time tracking to a payroll software package frees a small business owner to focus on the next sale or product improvement. No manual timekeeping means the data is available whenever you as a small business owner need it.

Ready to determine which payroll software is right for your small business?

Heartland is the point of sale, payments, and payroll solution of choice for entrepreneurs that need people-powered technology to sell more, keep customers coming back, and spend less time in the back office. Nearly 1,000,000 entrepreneurs trust Heartland to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of surviving the daily grind. Learn more at heartland.us.