How to Use Overtime Effectively

Many organizations are paying for overtime and wondering how they can reduce this expense and manage it better. Using overtime effectively is critical for organizations that want to control labor costs, improve workload management, stay in compliance and meet other workforce challenges.

Explore how to use overtime effectively to maximize your available resources and achieve strategic goals. 

How Is Overtime Regulated?

According to the federal Fair Labor and Standards Act (FLSA), overtime is the rate an employee must be paid at for all hours after the first 40 hours in a workweek. This rate must be no less than 1.5 times the non-exempt employee’s regular rate of pay — what’s known as time and a half.

Overtime is mandatory for nonexempt employees, who are also entitled to at least the federal minimum wage. Exempt employees are not entitled to overtime.

The FLSA, related regulation and rulings from the Department of Labor ultimately decide what constitutes overtime pay, and many states align closely with federal regulations. However, some states and local jurisdictions have additional overtime rules for nonexempt employees. 

For example, California has strict overtime guidelines requiring employers to pay nonexempt employees time and a half their for additional hours worked in excess of a standard eight-hour day or 40-hour workweek.

What Are Common Reasons for Overtime?

When is overtime good? Overtime isn’t inherently good or bad, as there are many reasons why an organization would use it in the course of operations. When used effectively, overtime can be a powerful tool for employers to manage their workforce. 

Some employers require round-the-clock staffing, for example. That means covering 168 hours each week. Let’s say such an employer schedules four crews, each working 40 hours a week. That leaves eight hours unstaffed. 

The quick solution is to assign each crew to work an average of 42 hours per week. While employers would pay each employee overtime, the cost of those overtime wages would likely be lower than the expense of hiring and training new employees for a separate crew.  

Some industries are seasonal, meaning the demand for products or services fluctuates. Asking employees to work extra hours during peak season might be more efficient and cost-effective than hiring temporary workers.

Organizations may also experience staff shortages due to short-term absences, such as vacation, illness, bereavement or jury duty. Rather than hire outside employees to fill these gaps, overtime might be a better option in the short term. While each overtime work hour costs more, going that route could be more efficient from a staffing and training standpoint.

While overtime can be a net cost-saving measure for employers and a way for employees to make extra cash, it can also become excessive. Signals of too much overtime include increasing absenteeism, worsening safety records and decreasing productivity ⁠— these all suggest employee fatigue and burnout from too many hours.

Productivity is also at risk when employees regularly work too many hours. Research suggests that employee output rises very slowly after 49 hours. In fact, 70-hour workweeks generate almost no extra output than a 56-hour workweek. While each industry and workplace is different, employers scheduling excessive hours could be paying a significant price for little to no reward.

Employers should look at internal structures, scheduling and alternative staffing solutions when they notice that overtime is becoming excessive or unproductive. 

How Can You Better Manage Overtime?

Managing overtime is like any other management task — a skill that improves with practice. These methods can help leaders better manage overtime within their workplaces.

Review Your Overtime Policies

Overtime policies should be reviewed and updated as employer and employee needs evolve. One obvious example is when the Department of Labor or another regulatory agency issues updated guidance or new reporting requirements.

Policy areas to regularly review include: 

• Does your company have mandatory overtime requirements?
• What are the criteria for assigning overtime?
• Does your policy have loopholes that allow employees to abuse the overtime system?
• Is overtime automatically and effectively tracked in your workforce management system?

Some employers might also need to involve unions when setting policies around overtime management. 

Consider Overtime in Labor Cost Allocations

Labor cost allocations are a foundational part of workforce and project management. Project costs can unexpectedly spike if overtime isn’t budgeted for but is incurred in the course of the work. That’s why it’s prudent to consider overtime in a standard cost analysis before any project begins.

While a standard cost analysis is just an estimate, this step can help project managers better anticipate total labor costs and staffing needs, which will help the organization be better prepared to meet agreed-upon timelines. 

Cross-Train Employees

One cause of overtime is when a few employees are responsible for a specific task, and no one else knows how to perform that work.

For example, an employer has a few employees dedicated to design work for clients. What happens when one of those employees departs or goes on an extended leave? The other team members can take on additional work, but only to a point. They’ll be forced to work overtime to complete all the work. This could be an acceptable short-term solution, but not if these employees can’t complete all the work or quality declines. 

By cross-training employees, organizations lessen the need for overtime because they can shift internal resources to cover for extra workloads, regardless of the cause. A side benefit is that employees can take time off without worrying about who will do their work.

How Your HCM and Overtime Go Together

Employers must monitor the amount of overtime each employee works to ensure that scheduling is correct, budgets are kept and compliance is met. But manual monitoring of payroll is difficult, not to mention assessing the performance management effects of overtime practices. 

Human capital management (HCM) systems can make this process easier, more automated and more accurate while keeping your organization in compliance. Here are a few ways HCM systems can improve overtime management.

Track Overtime Hours

To use overtime responsibility, employers must track and monitor overtime hours for individuals and for the organization as a whole. HCM solutions can account for different classifications of time worked and provide data-based comparisons that make it easy to spot patterns, such as if an employee is clocking in early or out late to earn 15 minutes of overtime. 

One way to track overtime is by calculating the company’s average weekly and monthly overtime needs. If overtime hours exceed that amount, an HCM system can display that, triggering a review of schedules and time cards. 

In these reviews, determine whether increased levels of overtime are a one-time occurrence or a sustained event. Your findings, based on accurate and up-to-date data, can help you make better decisions regarding overtime scheduling.

Program Automatic Overtime Calculations

HCM systems can automate complicated payroll processes — including calculating overtime. For example, your payroll team could program the regular rate of pay for the workweek, and the system would calculate payroll with the selected hourly rates. 

For union workers, HCM users can create a rate table for different local sections. Any time an employee changes locations, selecting the appropriate location gives the program permission to calculate the correct rates.

Keep an Eye on Absenteeism

Absenteeism is often a leading indicator of whether a company’s use of overtime is excessive. Monitor individual and organizational absentee rates to identify patterns that may indicate problems like burnout, especially if those employees have been working a lot of overtime hours. 

Absenteeism caused by excessive overtime can be a self-perpetuating cycle. When an employee calls out of work, colleagues who might already be working overtime have to fill in. This approach adds to existing employee fatigue, potentially increasing absenteeism and even safety hazards, depending on the job role.

HCM systems can help flag absenteeism-related concerns around overtime and prompt a reconsideration of workloads and policies.

Be Proactive With Overtime Management

HCM systems have many features that can help companies be proactive about compliance, including reports based on employee classifications and the ability to compare scheduled hours to actual hours worked.

Setting clear employee expectations regarding overtime is also a task your HCM can contribute, especially if you’re putting together an updated employee handbook. These expectations also apply to compensation, both for base hours worked and for expectations around overtime availability

Overtime is unavoidable for many employers, but they can get better at using overtime effectively. Consider how your policies influence overtime use, and lean on technology to automate overtime management and reporting so you can improve performance and maintain compliance.