Overtime Out of Control? Effective Cost Management Strategies

Following the release of the May 18, 2016 final rule regarding adjustments to the overtime threshold for the Fair Labor Standards Act (FLSA), organizations are working to make changes to meet the new requirements. The ruling adjusts the minimum salary needed to qualify for exemptions to $913 a week, or $47,476 a year. This will affect an estimated 4.2 million American workers.

This means organizations will have to be vigilant in keeping accurate records of hours worked among all non-exempt employees, and of course be judicious with their overtime budgets. Overtime can carry an organization through treacherous times, or speed its descent into the red. The difference is a matter of strategy.

PLANNING YOUR APPROACH
While overtime is often used in the heat of a difficult moment, it also can be successfully incorporated into an organization’s business plan. If your organization frequently relies on employees clocking extra hours, consider an overtime audit.

Analyze how overtime is currently used, both economically and culturally. How many hours of overtime are used per month? Which employees take advantage of it, and how effectively? Has it become an expected part of their income?

Determine key periods when the use of overtime is necessary and plan accordingly. By formally strategizing, you’ll take the surprise and much of the stress out of the process.

SETTING LIMITS
When overtime is offered, a few employees often voluntarily shoulder the entire burden. Consider setting individual limits to prevent resultant health and / or motivational problems among overworked employees.

Another strategy for handling the restriction of overtime hours is a rotation system. In one such system, employees sign up for overtime on a list. After an employee works a certain number of extra hours, his or her name is scratched off, and the next employee on the list will be eligible for overtime. This allows for a pool of potential overtime workers for any shift, and prevents any one employee from shouldering too much of the burden.

Alternatively, you may wish to offer overtime only to key employees or groups of employees who can handle the extra hours without a significant dip in productivity.

Staff redeployment often can be used in place of, or alongside, overtime. Increased cross training will facilitate redeployment, allowing employees to wear several hats during a given period. If your employees are sufficiently cross-trained, you can plan for the absences that result from overwork.

If overtime is used frequently at your organization, find out how your employees think it could be better handled. A custom survey may let you know how the majority feels, and can include open-ended questions that may garner innovative strategies tailor-made to your organization’s culture.

HOW TO KNOW WHEN YOU SHOULD HIRE
As you would determine overtime caps for individuals, you also can set systemic limits to ensure that your organization won’t be overtaxed by overtime.

Consider the reasons you’re using overtime. If the burden is unlikely to abate in the near future, you may be pouring money into extra hours that would better be spent in training or hiring.

Some employers insist that turnover costs are higher than overtime costs when benefits, vacation, payroll, and training are taken into account. If this is a concern, consider calculating the average turnover cost at your organization using one of the numerous free turnover cost calculators available online (search on Google for “turnover cost” for a plethora of tools). You may find that overtime is more costly than hiring. If the cost is the same—i.e., if a new employee’s total compensation plus turnover cost is the same 150% of total wages you’d spend on overtime—remember to factor in the hidden costs that come from overextending employees. In such cases you’d be wise to hire instead of allowing too much overtime.

THE DANGERS OF OVERTIME
Overtime can be a response to absenteeism. However, exhausted employees on the clock are more prone to absence-inducing conditions. In other words, unscheduled overtime often creates absenteeism.

Overtime hazards include the following:

• Stress 
• Lower levels of performance 
• Fatigue-related errors 
• Workplace injuries 
• Sickness 
• Depression 
• Work / life imbalance
• Burnout

As with any change in workplace practices, make sure that any alteration in overtime strategy is accompanied by the appropriate communication, or you may face a backlash in morale. In cases where overtime is offered only to specific employees, the reasons given should be especially clear to avoid feelings of unfairness among co-workers.

These flexible options are suitable only in a non-union work environment, as union contracts govern overtime rules. By employing principled negotiation and integrative bargaining techniques during contract talks, however, unionized employers also may be able to effectively control overtime costs.