Time clock rounding is legal under federal and California law. Time clock rounding is the practice of adjusting raw employee punch-in and punch-out times to a standardized, nearest time increment. It is typically justified as a way to simplify payroll calculations or to provide a minimal amount of time warranted for completing recognizable work. Frankly, it is really just to account for reality and providing a reasonable amount of leeway for both the employee and employer. It is simply not reasonable to expect every employee to always be able to punch in at exactly 8:00:00 AM per week day or to punch out exactly at 5:00:00 PM per week day.
Were it not permitted, it would be easy for employees to game the system by staying a couple of minutes late to accrue non-productive overtime (or double-time, in some circumstances). On the flip-side, it would be just as easy for employers to deduct time from an employee for arriving a minute or two late or leaving a minute or two early. So, the law has recognized and accepted the detente seemingly achieved by permitting rounding. So long as it is not abused.
The standard amount of rounding can vary, so long as it is consistent. Many employers round to the nearest 0:15 minutes or the nearest 1/10th of an hour (i.e. 0:06 minutes). Again, this seemingly makes payroll easier (i.e. 7.25 hours worked, 7.10 hours worked v. 7.1444444 hours worked).

Federal Law on Rounding

The US Department of Labor allows for rounding of time punches. Specifically it allows for a rounding scheme to the nearest 15 minutes but only if that scheme is applied impartially and consistently. Employers cannot apply different rules to punching in and out in an effort to minimize recorded hours.

California Law on Rounding

There is no specific California law on rounding. However, case law indicates that time clock rounding is fine as long as it doesn’t result in employees being underpaid and that it is fair and neutral. Specifically, a California Court of Appeal found that since California was silent, federal law should apply. (See’s Candy Shops, Inc. v. Superior Court, 210 Cal. App. 4th 889 (Cal. Ct. App. 2012), review denied (Feb. 13, 2013).
By its ruling (and the California Supreme Court’s denial of review), the Court clarified and expressly permited employers to round time entries. This removed much of the legal uncertainty that had existed about the permissibility of this practice in California, and brought California in line with federal law on this important subject.

Words to the Wise

Employers should  remain vigilant to ensure that the rounding policy used is not (deliberately or not) (1) favoring underpayment over overpayment of overtime and (2) hiding actual work being done outside of scheduled work time.
They can do that by first ensuring that any time clock system they use records the actual punch-in and punch-out times. This makes the system susceptible to an objective audit on how it is being used. Second, any rounding system implemented should be applied fairly (i.e. the same on the front as in the back), without bias and without resulting in employees being underpaid. Rounding really should be carried out automatically by your time clock system without the need for manual intervention.
In addition to your system, be mindful of your business’s culture. If the environment encourages early morning chit-chat or end-of-shift decompression, make sure that your employees are actually clocking-in and clocking-out when they are starting and ending work. Just because they show up 15 minutes early does not mean that they are entitled to clock-in and then read the newspaper or talk up the new interns. Similarly, just because they are waiting for their bus or train or getting ready to head out for a party or get together, does not mean that they can necessarily stay on the clock. You have the right to ensure your employees are working when they are clocked-in.
However, what is more likely to happen is that employees will work off the clock. And as mentioned above, you need to remain vigilant to ensure that such time is accounted for and paid for, or thwarted through enforcement of policy and office culture. Otherwise, you could be subject to a snowball-ing wage claim for off-the-clock work by any number of employees.