Is Your Company A "Large Employer" Subject to "Obamacare" -- Understanding the 50 full-time Equivalent Threshold

It has been well-publicized that, beginning in January 2013, employers with more than 50 full-time employees will be required to comply with "Obamacare" by either providing insurance benefits for their employees or paying a penalty.   There has been much speculation for example that the American economy will begin to resemble France, in which an inordinate number of employers stop hiring at exactly 49 employees to avoid the regulations that kick in at 50 employees. 

But if any employer wishes to follow this "49'er" strategy it needs to understand that Obamacare's definition of a "large employer" subject to coverage is actually based on a special definition of "full-time equivalent" employees.  In essence, the new law aggregates all part-time hours worked and treats 120 monthly part-time hours worked by any number of individuals as equivalent to one full-time employee.  For example, as explained by a report of the Congressional Research Service 

"Full-time employees” are those working 30 or more hours per week.  The number of full-time employees excludes those full-time seasonal employees who work for less than 120 days during the year.  [However] The hours worked by part-time employees (i.e., those working less than 30 hours per week) are included in the calculation of a large employer, on a monthly basis, by taking their total number of monthly hours worked divided by 120.

Employers may also be tempted to avoid application of the statute by obtaining services from independent contractors rather than employees.  In California, however, employer must be very careful to avoid the penalties and liabilities that can result from misclassifying employees as independent contractors.

At-Will Termination May Be Fatal to Independent Contractor Status -- Monarrez v. Automobile Club of Southern California

In Monarrez v. Automobile Club of Southern California a motorist was struck by a car while his disabled vehicle was being hooked up by a tow truck operator who had been dispatched by the defendant.  This raised the question of whether the tow truck operator was an employee for whom the dispatching company was legally responsible, or an independent contractor.  

In conducting this analysis the Court hit all the usual points.  Noting for example that "The label placed by the parties on their relationship is not dispositive" and that the essence of the test is "whether the principal has the right to control the manner and means by which the worker accomplishes the work."  

But most interesting was the degree to which the court stressed the company's right to terminate the relationship at-will as a nearly outcome-determinative indication of "control." 

The right to terminate employment at any time strongly tends to show the subserviency of the employee, since it is incompatible with the full control of the work usually enjoyed by an independent contractor. Perhaps no single circumstance is more conclusive to show the relationship of an employee than the right of the employer to end the service whenever he sees fit to do so.

Other courts have tended to treat the right to terminate at-will as a mere "secondary" factor apart from the central control issue.  But if the trend is to treat an at-will termination provision as dispositive (or nearly so) it will go a long way toward creating a bright-line rule which can be evaluated on the face of the parties' contract.   

Monarrez involved tort liability to an injured third party.  But the greatest exposure for many employers will arise from Labor Code section 226.8 which imposes a penalty of up to $25,000 for each misclassified contractor (not to mention the separate obligations to reimburse the expenses and pay overtime wages to misclassified employees).   


Time "Rounding" and "Grace Period" Policies -- See's Candy Shops v. Superior Court

In See's Candy Shops v. Superior Court, the Court addressed two separate issues concerning the recording and calculation of hours worked by non-exempt employees: (a) to what extent may employers "round" worker time entries; and (b) to what extent may employers base hours of pay on "scheduled" work times that differ from the actual time punch records. 

Rounding of Time Entries.

It is a fairly common practice for employers -- especially those using commercial time tracking software such as Kronos -- to calculate work time based on "rounded" time entries. For example, if an employee clocks in for work at 8:53 a.m. the policy may "round" this entry to the nearest 15-minute interval and therefore pay the worker only for time worked after 9:00 a.m.

See's Candy reached the common sense conclusion that rounding is fine as long as the incidents of "rounding up" and "rounding down" roughly  cancel each other out, thereby resulting in a generally accurate  measure of hours worked.

Assuming a rounding-over-time policy is neutral, both facially and as applied, 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.

Employers cannot assume, however, that a policy is always permissible merely because it rounds up as well as down.  The key phrase here is that the policy must also be fair to the employee "as applied." 

For example, consider an employer that requires its workers to be on the job by no later than 9:00 a.m. but also prohibits unauthorized overtime or clocking in early.  This combination of policies would basically require (or at least strongly encourage) employees to always clock in between 8:53 a.m. and 9:00 a.m. but never later.   Over time, and over the course of an entire labor force, this systemic rounding bias could result in a substantial amount of unpaid work time. 

Unpaid "Grace Period" Time.

A related practice evaluated in See's Candy is a a so-called "grace period"  policy.  Under this policy "employees whose schedules have been programmed into the Kronos system may voluntarily punch in up to 10 minutes before their scheduled start time and 10 minutes after their scheduled end time."   However, "Because See's Candy assumes the employees are not working during the 10–minute grace period, if an employee punches into the system during the grace period, the employee is paid based on his or her scheduled start/stop time, rather than the punch time."

As the Court explained the "grace period" policy presented a different issue from rounding.  Under the rounding policy the employees were admitedly working and the issue was whether the policy resulted in an accurate record of their work hours.  Under the "grace period" policy the employer "assumed" that no work was being performed and the issue was whether that assumption was accurate.

If the evidence later shows that the employees were working or “under the control” of See's Candy during the grace period and they were not paid for this time, they may be entitled to recover those amounts in the litigation and any applicable penalties.


Internal policies like "rounding" or "grace periods" do not create special defenses to wage claims.   Rather, like any other employer policy, they are valid or invalid only to the extent they comply with the standard legal obligation to accurately record and pay for all hours actually worked.   The test is therefore how the polices operate in practice in combination with the Company's actual work requirements and other policies.