Using Overtime Effectively

Overview

This toolkit discusses three main topics on the subject of using overtime effectively:

• Reasons for using overtime.
• Problems with excessive overtime.
• Corrective measures.

Although many people think overtime should be avoided, it is actually a good choice for employers in several situations, including the following:

• It is an efficient solution for 24/7 coverage.
• It allows employers to quickly respond to short-term variations in workload or staffing while only having to pay for the time needed.
• It can improve the organization's competitive position in the local labor market because many employees like the extra income overtime provides.
• It may be less costly than hiring and training a new employee.

Effectively using overtime requires an understanding of the potential negative effects on employees; overtime use is not effective if it results in employee burnout, excessive turnover or a reduction in employee engagement. Excessive overtime can interfere with an employee's ability to get adequate sleep, which can lead to health problems for the employee and safety and quality problems on the job. If the overtime is prolonged, it may create an overtime-dependent workforce, higher absenteeism and lower productivity. Although high levels of overtime may be tolerable for short durations, long-term overtime may be harmful.

To minimize problems with overtime, managers should keep an eye on both overall and individual overtime hours. They should also monitor absences to better understand why employees are missing work and if the absences follow a pattern or cycle from year to year. Managers should have a good understanding of the facility's workload to know whether it is steady or variable, why it changes and the forecast for the rest of the year. Finally, managers should review the organization's overtime policies to ensure they are effective and provide adequate protection for the employees.

Background

In 1938, the Fair Labor Standards Act (FLSA) set the "official" workweek for nonexempt employees of covered employers at 40 hours and required a 50 percent premium in pay for hours worked in excess of the 40 (i.e., time-and-a-half pay). See What You Need to Know About ... Overtime Pay.

The major goals of the FLSA were to:

• Create jobs.
• Establish a minimum wage.
• Protect employees from overwork.

A secondary effect has been the widespread belief that overtime is expensive or unsafe and should be avoided whenever possible. However, when used properly, overtime is a very powerful tool for meeting workload demands while minimizing costs and maximizing employee compensation and satisfaction.

Reasons for Using Overtime

There are four main reasons for using overtime:

• 24/7 coverage.
• Workload fluctuations.
• Staff variations.
• Labor market considerations.

24/7 coverage

The simplest and most common way to provide 24/7 coverage is with four crews. If the crews work 40 hours a week, that provides 160 hours of coverage (4 crews x 40 hours = 160 hours). The problem is that there are 168 hours in a week (24 hours x 7 days = 168 hours). There are three ways to fill this eight-hour gap in the weekly coverage:

• Hire part-time employees. Finding and retaining good part-time employees is always challenging. Part-time positions tend to have higher turnover rates, so more management time will be spent keeping the positions filled. Many part-time employees have limited availability, making it more difficult to fit them into the schedule.
• Employ an additional crew. This is an expensive solution, since the employer would hire an additional 40-hour crew for only eight uncovered hours. While the employer can schedule the remaining 32 hours for other purposes, such as absence coverage (relief), training or maintenance, if these other functions are not needed on a regular basis, hiring an additional crew is not the most efficient solution.
• Use overtime. The most popular option is to schedule the four crews to work an average of 42 hours a week. Although this requires paying a small amount of overtime (5 percent) to each employee, this is perceived to be easier and is typically less expensive than the other two options.

Workload fluctuations

In many industries, demand for products or services is not constant throughout the year; seasonal or periodic variations may occur. For organizations that experience these fluctuations, ensuring enough product is available throughout the year requires creative use of staff and product. There are four common ways to adapt to these seasonal busy periods:

• Stockpile product during slow periods. Stockpiling product works well for organizations whose products have sufficiently long shelf lives. Even then, however, having sufficient inventory available to meet every surge in demand is not always possible. Stockpiling is not an option for companies that provide services rather than products.
• Hire temporary employees during the busy periods. Employing temporary help is a good solution if the busy staffing period requires additional low-skilled staff and does not require lengthy training. It is costly, though, to invest training resources in workers who are with the organization for only a short time.

• Maintain enough full-time staff to cover the peak workload periods. Hiring full-time regular employees to have adequate staffing during the peak workload periods can result in overstaffing when the workload declines. Unless excess employees are laid off during slower periods, an employer must pay all employees throughout the year. The cost of overstaffing adds up quickly, making this option the most expensive of the four.

• Use overtime. Requiring overtime hours from existing regular employees is a popular choice to manage peaks in work demand. Overtime provides employers with immediate access to a pool of workers with the skills and training to do the job, and it is not as expensive as it first appears. Even though overtime involves paying a 50 percent premium, paying short-term overtime to fully trained employees is not much more expensive than the fully loaded cost of straight time for new employees. Employee benefits such as insurance and vacations are usually paid based on straight-time hours worked, which can increase the average wage by 30 percent to 40 percent or more. There is also the cost of hiring and training new staff. For highly skilled workers, these benefits and training expenses can be substantial.

In contrast with the other options, overtime offers the most flexibility to match the workload variations at a reasonable price.

Staff variations

Even when the workload is constant, occasions may arise when not enough staff is available to do the work. Short-term personnel shortages can occur as a result of employee turnover or absences such as vacation, illness, jury duty, military leave, bereavement or disability.

If the turnover and absence rates are fairly consistent, hiring full-time relief personnel may help. In most cases, however, turnover and absences do not occur regularly, so relief capacity may not be needed at all times. Rather than hiring additional full-time, regular employees and managing excess capacity (i.e., idle time), filling short-term vacancies by using overtime may be a good option. As with workload variations, using overtime to address staff variations allows employers to draw from a skilled pool of workers, and only paying them when needed.

Labor market considerations

Many organizations offer overtime to attract and retain employees. Offering overtime boosts the employer's appeal because many people want the additional earnings from overtime. A survey by scheduling software provider Shiftboard found that 93 percent of surveyed employees are willing to work overtime, as long it is optional. Employers that offer modest amounts of overtime will both satisfy a majority of their employees and improve their competitive position in the local labor market.

Problems with Excessive Overtime

Although overtime can help employers and may be valued by some employees, there are limits to the amount of overtime that is beneficial. High overtime, especially when it continues for an extended time period, has several potential drawbacks:

• An overtime-dependent workforce.
• Safety and quality issues.
• Absenteeism.
• Lower productivity.

Overtime dependency

When overtime levels are constantly high, employees may become dependent on that additional income as a source of their regular pay. They might buy another car, a boat or a house and rely on overtime to make the payments. Consistently high overtime levels also may attract a disproportionate share of new employees whose financial situation makes them completely dependent on overtime hours and pay.

Safety and quality

Research on the relationship between long hours of work and employee safety and quality is inconclusive. Some researchers have found that long workweeks increase the risk of occupational injury and errors. Other researchers conclude that a person's underlying health, demographics (e.g., gender) and compensation type (hourly versus salaried) are more important than the hours of work in predicting an adverse outcome.

Despite these mixed conclusions, there is no question that long hours of work result in less sleep and poor quality sleep.

According to the National Safety Council, 16 percent of workers surveyed reported at least one safety incident due to fatigue. When employees work lots of overtime, they do not get sufficient time off to recover or catch up on their sleep. This, in turn, can lead to fatigue and reduced alertness. Managers cannot ignore the possibility of increased safety and quality incidents under these conditions. See Work Schedules: Shift Work and Long Hours.

Absenteeism

Reduced sleep from prolonged high overtime levels will eventually adversely affect employee health and work attendance. Numerous research studies have found long work hours to be associated with variety of health problems, particularly among older workers. Long work hours also appear to be linked to changes in lifestyle behaviors such as smoking, coffee and alcohol consumption, unhealthy diet, and lack of exercise. Ultimately, these unhealthy choices will be reflected in the organization's absence rates. See Workplace Burnout Is Now an 'Occupational Phenomenon'.

Productivity

A number of studies have attempted to define the relationship between hours of work and productivity. Many of these studies have found that when high levels of overtime begin, marginal productivity slows. In other words, the total output increases, but the hourly productivity is lower than it was during the first 40 hours. After a few months of high overtime, however, total output may be little more than that attainable in a 40-hour week. This is believed to be caused by a combination of fatigue, poor morale, increased absences, work pace inertia, and rework due to mistakes and defects. The key point here is the duration of overtime. High levels of overtime may be tolerable in the short term, but they can become detrimental if they continue too long.

Corrective Measures

To avoid problems that can occur when high levels of overtime continue for extended periods, employers should regularly monitor overtime and absences. Employers also must understand the workload variations and take steps to improve the accuracy of demand forecasts. Periodically, HR professionals should review the organization's overtime distribution policies to make sure they are working properly. See Practicing the Discipline of Workforce Planning.

Use of overtime

It is important to keep track of both overall averages and individual overtime hours. If the average overtime at a facility exceeds 10 hours a week, employers should determine whether it is expected to continue. If so, they should then evaluate the need to hire additional staff. In cases of very high overtime (more than 20 hours a week), HR professionals may want to consider tactics to reduce the overtime burden, such as new shift schedules or temporary workers. Another consideration is the consistency of overtime at the facility. Even with low to moderate amounts of overtime (less than 10 hours a week), it is possible to create an overtime-dependent workforce with steady overtime. Ideally, overtime (other than that built into the work schedule) should drop to zero from time to time. Even when overtime levels are reasonable, there can be wide variations among individual employees. It is not uncommon to find that 20 percent of the workers are doing 80 percent of the overtime. This is okay as long as the amounts are not excessive or long term. If a few people are working too much overtime, employers should consider changing the overtime distribution policies. Some companies put a ceiling on the number of hours employees can work in a week, month or year. Others have procedures that ensure a more even distribution of the overtime.

Absences

As with overtime, it is best to track both overall averages and individual absences. To obtain organization averages, HR must understand the reason for the absences. Are they a result of vacations, illness, disabilities, training, employee turnover or something else?

Second, employer need to look at the weekly variations. Are they spread out, or do they exhibit cyclical patterns? If there is a substantial increase in absences during the summer months because of vacations, an employer may want to consider implementing a policy that limits the number of employees who can take vacation at the same time.

Monitoring individual absences is also important. Employees do not appreciate co-workers who abuse the absence policies; they want the company to crack down on the few employees who are taking advantage of the system. See Tackling Excessive Absenteeism.

Workload

Does the organization's workload fluctuate from week to week? Does it follow a seasonal pattern? Is it linked to economic conditions and rises or falls accordingly? Many organizations struggle with forecasting demand. They cannot be certain whether the changes are temporary or permanent. Historical patterns may have little bearing on the future. Nevertheless, it is important to stay on top of the situation and the variables that are most influential.

If an employer can anticipate peaks in the workload, it can switch to a different schedule with high overtime built into it rather than force overtime on employees at the last minute. Communication with employees is essential; they want to know as far in advance as possible about the need to work overtime. The more an HR professional can do to improve employees' understanding of the forecasting process and its limitations, the better, since many employees are skeptical that management does this forecasting and work planning effectively.

Policies and procedures

HR professionals may want to periodically review the organization's overtime distribution policies and procedures for fairness and to protect against problems such as excessive overtime for individual workers. The following areas should be examined:

• Mandatory overtime. How much of the overtime is voluntary versus mandatory? A high proportion of forced overtime means employees cannot plan their lives away from work, which can lead to poor morale. How much lead time is given when notifying workers about mandatory overtime? Limited or no advance warning of overtime is one of the most frequent complaints from shift workers. See Can an employer require its employees to work overtime?

• Selection criteria. What criteria are used when choosing who gets the overtime? Using seniority may seem fair, but it can cause resentment among junior personnel. Are there other reasonable criteria, such as attendance, training or performance that employees would perceive as more equitable?
• Abuse potential. Does the policy for covering absences inadvertently encourage employees to play games with their sick time and overtime? For example, one week an employee calls in sick so that another employee gets held over for coverage and receives overtime pay; then they reverse roles the following week or month.
• Pension incentives. Does the organization's retirement plan encourage employees to increase their earnings in the last two or three years of employment? This may result in senior employees who are approaching retirement taking all the overtime they can get to boost their pensions.
• Shift length. The method for distributing overtime depends on the shift length. With eight-hour shifts, employees are held over or brought in early to cover an open shift. Splitting the open shift is preferable to holding someone over for the entire shift and making him or her work 16 hours straight. With 12-hour shifts, employees must come to work on a day off. Sometimes, especially with long-break schedules, it can be hard to encourage employees to sacrifice a day off. If the organization must meet federal standards on the number of days off (such as in nuclear power plants, air traffic control or certain chemical production facilities), managers may have limited flexibility to required overtime. Considerations such as these may limit an employer's ability to rely on overtime, dictating the need to hire relief personnel.
• Cross-training. Another tactic that can help with absences and temporary workload increases is cross training. This expands the number of people available to support areas with temporary workload increases or absences. If there are highly specialized positions with only a few qualified employees, training additional staff to do those jobs can prevent slowdowns or help out on occasions when more output is needed.

See:

Overtime Policy Sample

Shift Differential Policy

Overtime can be used by employers to motivate employees and even out periodical peaks in work needs. HR professionals can help employers properly use this "tool" of overtime, keeping track of its use and monitoring employees' reactions—both short and long term—to its continued need.