Is Overtime Really a Problem?

I recently participated in an online forum about the “Evils of Overtime.”  I was surprised at how uniformly overtime is seen as something to be avoided.  Its as if overtime was a measurement of how poorly you were managing your workforce.  Here was one of my comments:

Overtime is only a problem if you see it as such. It’s not unusual for a company to contact me with an “overtime” problem. They look at their costs and see, for example, a million dollars spent on overtime last quarter. They think they will save this amount if they eliminate overtime. The fact is that, unless they are improperly staffed, they will only reduce overtime by increasing straight time (hiring). After all, the work supposedly needs to be done and eliminating overtime means its either not getting done or you found another way to do it.

The cost of an hour of overtime is typically competitive with the cost of straight time. I’m working at a company right now and the precise cost of paying someone $15.47 an hour is $25.25. At the same time, the cost of paying someone that same hourly rate at time-and-one-half is…$25.35 an hour. 10 cents more!

Overtime allows you to compete for labor even though you cannot afford a high hourly rate. People can make more money and supplement their income in spite of low wages. I can work at company A for $20 an hour but no overtime or I can work at company B for $17 an hour but can work all the overtime I want.

Overtime is flexible. You don’t have to buy it in 40-hour/week increments. The person is already trained and hired.

On the downside, there are fatigue/safety issues, although these can be managed if you are paying attention. There is also to potential of too much overtime – translated into “not everyone likes a lot of overtime but everyone is getting a lot of overtime.”

This last issue can be fixed if you remember that overtime is a function of how much work there is and how many people you have to share in that work. Variations in workload aside; you should staff to the point that there is typically reasonable amounts of overtime for those that want it and very little mandatory overtime for those that don’t.

Two rules of thumb: (1) 20% of your workforce wants a lot of overtime; 20% wants no overtime and 60% will take it from time to time and (2) If you workload is flat, you should be in the 5% to 15% overtime rate. Note: Companies often boast that they are perfectly staffed because they have no overtime. They couldn’t be more wrong. Zero overtime almost certainly means you are overstaffed.

2 thoughts on “Is Overtime Really a Problem?

  1. MARCO

    Hi there,

    Thank you for this usefull information. I have some concerns regarding a department in my organization that put down the max of the overtime hours and not only one person but all the employees. Second, I don’t have shift system so it’s only overtime. Should I change it to shift system?or increase my staff? or is there a better sulotion where it’s not going to cost me as much as the overtime?

    Regards,
    Marco

  2. Jim Post author

    Hi Marco,

    Overtime is reduced by increasing straight time hours. The trick is to not increase straight time hours beyond the number of hours you need since that would constitute over staffing (a very costly mistake).

    It’s a common mistake to think that increasing staffing will save money by reducing overtime. The truth is that the cost to your organization for an hour of overtime and an hour of straight time is probably almost the same. This means you can hire people and someone will say, “Wow! Look at all the overtime we saved!” Meanwhile, someone else should be saying, “Hey, our straight time costs just went up by the same amount our overtime costs went down.”

    So, cost wise, if an hour of work needs to be done, straight time and overtime are interchangable as far as costs.

    However, if the work does not need to be done, the hourly cost should be zero. If you overstaffed (to reduce overtime for example), then you might be paying someone to be there when you don’t need anyone. This is not a cost neutral issue. You would pay nothing if you were not overstaffed and now you are paying the full wages and benefits of someone you don’t need.

    With regards to the overtime cap…

    There is always a reason for why decisions are made (not that all reasons are good reasons). When we see this “cap” idea imposed, it is often done under the assumption that overtime is not being used wisely. That is to say, maybe people are working slow so as to create the need for overtime.

    Sometimes the cap is put in place so someone can say, “Look at all the money I saved.” The reality is that the money way saved by not doing work that may or may not have needed to be done in the first place. For example, McDonalds could stop all overtime resulting in either (a) the elimination of the fraudulent use of overtime or (2) not enough hamburgers were cooked to meet customer demand.

    With regards to creating a shift system…

    This is a complex issue so I will take a stab at two of the major considerations.

    1. Do you have a task that needs 16 hours of continuous work? If so, then add another shift.
    2. Is there a way to do the work during regular hours if you just had enough people? If so, add the people and don’t add the shift.

    Always keep in mind that hiring someone is a commitment to them. So, if it looks like your need for extra hours is short-term, then go with the overtime. Always make sure that you are not going to over staff. Adding extra shifts entails a lot of hidden costs such as “keeping the lights on” or additional supervision etc.

    I think I’ve covered about as much as I can in a comment section. If you need more help, give me a call at (415) 763-5005.

    Jim

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