Suppose I asked you the following question: “Will an employee make more or less money when they work overtime?”
You might quickly answer: “Yes. They make anywhere from 50% to 100% more when they are being paid at the overtime rate.”
And you would be right.
Now, suppose I asked you, “Which costs you, the company, more to pay: overtime or straight time?”
This question is much more complicated and has a surprising answer.
When you take into account the cost of straight time, you must consider the additional cost of medical plans, retirement, vacations, holidays etc. While overtime and straight time both have payroll taxes, only straight time is burdened with all of these other costs.
The fact is that the cost to your company for an hour of straight time or overtime is probably about the same. My experience is that they are nearly always within 5-10% of each other; sometimes straight time is more and sometimes overtime is more.
The math says that the higher your hourly rate is, the more likely it is that overtime will be more expensive. Conversely, the lower your hourly rate, the more likely it is that straight time is more expensive.
This is a rather fortuitous result. When your wages are low, you can use overtime to enable your employees to enhance their income. In doing so, you may actually be lowering your hourly labor cost.
If you have any questions regarding this or any other shiftwork issue, please give me a call.
Jim Dillingham, Partner
Shiftwork Solutions LLC