Analyzing overtime costs can be an important strategic step in determining when to hire new workers and improve efficiency in operations, labor costs and productivity.
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. If 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, which 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, which 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 overtime hours. Analyze the fixed costs and variable costs of hiring new employees and paying for current overtime to determine your organization's break-even point.
Using Overtime Strategically
Many employers use overtime 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 overtime costs. To use overtime 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 and leverage it to keep costs down. Here are a few strategic steps you can take to better maximize your use of overtime:
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