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 the 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 the 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 are 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 your 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.

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When is high overtime appropriate?

We are typically asked about ways to lower overtime. It is clear that most companies view overtime as a necessary evil. They try to get it as low as possible and consider all overtime reduction as cost savings.

In many instances, they are right. However, just as often, they are wrong.

From a pure tangible cost perspective, overtime probably is about 10% more expensive than straight time.  This means you can reduce overtime costs by adding more people (more straight time hours).  However, suppose you try to do this but overshoot the mark.  You hire so many more straight time hours that you now have more than you need.  You are overstaffed.

Being overstaffed is about fifteen to twenty times more expensive than being understaffed.  If you are understaffed you pay for overtime instead of straight time.  This probably comes to an extra couple of dollars an hour.  If you are overstaffed, you are paying full wages and benefits to hours you don’t need.  Depending on your hourly rate, this could be anywhere from $20 per hour to well over $40 per hour.

So back to the topic at hand.  When is high overtime appropriate.

The short answer is – when your workload is highly variable.

A longer answer would be – when your workload is highly variable and the skill set you require of your workforce is not readily available using any of the traditional workforce arguments (i.e. part-time and temporary labor).

If you staff to match peak workloads and your workload is variable, then you will find yourself overstaffed quite often.

If you staff to match you lower workloads, you will find yourself understaffed.  This means overtime.

The greater the variability, the more idle time you will incur if you staff to peak production and the more overtime you will incur if you staff to minimum production.  Since overtime is significantly less costly, you will pay less if your staffing tends towards the minimum production.

There are ways to schedule your workforce to closely match a variable workload.  The more predictably variable it is, the better the match becomes.

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