Analyzing Overtime Costs: A Strategic Step for HR

• Learn how to analyze overtime costs for your company.
• Discover three steps to help you determine whether you should pay overtime to current employees or hire new workers.
• Learn four ways to help you use overtime hours strategically.

Analyzing overtime costs can be an important strategic step in determining when to hire new workers. It can also help to improve efficiency in operations, labor costs, and productivity. Do you need help analyzing overtime for your company? Start here, then give your Fiducial representative a call to discuss your specific situation.

Overtime vs. more hires

An important strategy for making hiring decisions is looking closely at the costs of overtime compared with the costs of hiring additional employees. Those costs will vary based on the employee's salary and other factors.

Here are three steps to help determine whether it's best to pay overtime to current employees or hire new workers.

1. Determine fixed costs of hiring an employee

Those costs may include an annual cost for health insurance, benefits, paid time off and other paid leave mandated by law or through an employer's policy. Multiply the potential employee's daily pay rate by the total number of paid days off they are entitled to each year. Fixed costs will stay the same — regardless of the number of hours a person works.

2. Determine the costs of paying overtime

If an employee's hourly wage is $15, your business pays them approximately $600 for a 40-hour workweek. When the employee's regular rate of pay is $15 per hour, under the FLSA they would be entitled to time and a half for all hours worked over 40 hours in a workweek. This amounts to $22.50 per hour. If that employee works an extra 10 hours, they cost you $825 in weekly payroll. These are variable costs and do not take into consideration any state overtime requirements. State requirements may be even more generous to employees.

3. Crunch the numbers

If you only need 10 extra hours of work out of a $15-per-hour employee, it may not be worth the cost of hiring a new employee and paying the fixed employment costs for a new person. But at some point, it will become cheaper to hire a new employee — even part-time — than to continue paying for more than 40 hours per week. Analyze the fixed costs and variable costs of hiring new employees and paying for current over time to determine your organization's break-even point.

Using overtime strategically

Many employers use this time to cover for absences or allow employees to catch up on missed work. But rather than using overtime as a last-minute approach to playing catch up, businesses can benefit by being more strategic and by analyzing these costs. To use this time strategically, determine how you might use it over the long term to meet production demands at certain times of the year or to fulfill uncharacteristically large orders.

With an integrated, cloud-based HR system, leaders can quickly access a wealth of data. They can then leverage this data to keep costs down. Here are a few strategic steps you can take to better maximize your use of these hours:

Figure out your current usage

Dig into your internal data to study which employees or departments incur these costs most often and for what reasons. Most modern systems allow you to quickly create reports showing which employees work the most extra hours, which departments work the most overtime, and how much those extra hours cost the business. By mining that data — and conducting conversations with managers in key departments — HR leaders can develop valuable intelligence and make strategic decisions.

Establish policies

Once you understand how your business currently uses these extra hours (and how much it costs), you can use that knowledge to establish long-term policies for this usage. For instance, if certain departments seem to overuse this time, you may institute guidelines that allow them to use this time only during certain busy months. You could also put a cap on the number of overtime hours employees can work during a month or quarter.

Through analyzing current overtime usage, you can figure out for which positions overtime is necessary. Then you can allow it only for those positions. That way, you use overtime strategically and cut costs by avoiding its overuse. However, it's important to be consistent if you only allow overtime for some positions and not others.

You should also have policies that require employees to obtain written authorization before working overtime. This way, you can more proactively manage it. Even so, employees who exceed the cap or work overtime without authorization must still be paid for all hours worked.

Cross-train employees

Consider cross-training employees to avoid overuse of overtime when employees are absent. That way, employees who normally work in other areas can help with certain projects when key personnel is away.

Strike a balance

While many employees appreciate the extra income offered by working overtime, they also need time for rest and the freedom to schedule activities outside of work. Even if some overtime hours are mandatory or built into the work schedule, ensure that most overtime hours are optional so that employees won't feel bound to work and morale doesn't suffer. Also, proactively manage employees who incur excessive absences.

Overtime is not just a quick fix to meet last-minute needs. If used strategically, it can also help you manage costs and improve production. Need help managing overtime costs? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.

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