Overtime Can Destroy Your Labor Budget: How to Avoid It

Hourly employees must legally be paid overtime for certain hours worked, but that money may be eating into your labor budget. Sometimes overtime can’t be avoided, but there are many reasons to keep these costs under control. Consider some of the following risks and suggestions for managing overtime costs.

Risks of Unplanned Overtime

The federal Fair Labor Standards Act requires overtime pay be issued to non-exempt employees at a rate of one and half times their regular pay for each hour over 40 worked in a workweek. The workweek is defined as any 7 consecutive 24-hour periods. Some states have additional overtime regulations. 

Additional Costs

Time-and-a-half of the hourly rate doesn’t tell the whole story, though. To truly calculate the cost of overtime, you need to consider other business costs.

Using this Complete Overtime Cost Calculator Framework, other calculations include:

1. Additional tax burden overtime cost × 0.0765 (Social Security/Medicare) + state-specific taxes
2. Proportional benefits costs (health insurance, retirement contributions, etc.)
3. Hidden costs
   • Increased workers’ compensation premiums
   • Higher error rates and rework costs
   • Accelerated equipment wear and maintenance
   • Management oversight time

Acknowledging these additional costs shows it costs the company more than just 1.5 times the hourly wage.

Employee Burnout

It’s true that more time spent at work means less time employees have to tend to other obligations and things they enjoy. But overtime is not always that simple in its impact. A Deloitte study found that “nearly half of Americans feel ‘time poor’—like they have too much to do and not enough time to do it.” 

To try and accommodate the myriad demands on their time, people tend to settle into patterns. They may find that a stop at the gym after work helps them unwind, or they may prioritize spending dinner time with their spouse and children. Routines help people maintain work-life balance and find motivation for healthy and uplifting habits.

The expectation of a certain work schedule can become an important part of daily routine: you know work ends at a certain time. Unexpected, frequent overtime can disrupt routine by causing people to miss important events, change exercise or sleep habits, or eat on the go. For some people, disruption can lead to irritability, frustration, and disengagement with the work. While there are situations where overtime may be necessary, planning and acknowledgment of the emotional costs can go a long way in helping to avoid worker burnout.

Decreased Productivity

Many studies have looked at the relationship between worker productivity and hours worked.

CNBC reported “that employee output falls sharply after a 50-hour work-week, and falls off a cliff after 55 hours—so much so that someone who puts in 70 hours produces nothing more with those extra 15 hours, according to a study published last year by John Pencavel of Stanford University.”

Long hours are connected to absenteeism, turnover, and fatigue. The CDC has suggestions to combat the fatigue associated with working long hours, suggesting it has significant health and safety impacts, particularly in fields where the workers interact with machinery or the public. 

How to Avoid Overtime

The Bureau of Labor Statistics reports that, in certain industries, employees work an average of almost 4 hours of overtime, with trends creeping upward. If your business finds itself in this scenario, consider some of the following ideas to avoid it.  

Reclaim Organizational Capacity

A recent study asked businesses to consider that tools meant to increase productivity and efficiency may actually be making more work. “Part of the problem may lie in the belief that visible effort should be the primary measure of productivity, pressuring workers to always be ‘on.’  Respondents to Deloitte’s 2025 Global Human Capital Trends survey report that 41% of their time every day is spent on work that doesn’t contribute to the value their organization creates.”

There’s a risk that these extra efforts impede the actual work that needs to get done. This may produce an atmosphere of busyness but putting employees under pressure to meet deadlines. Overall, your company may experience decreased morale, erosion of culture, and worker stress.

Deloitte’s survey results suggest a focus on a few concepts to redefine the concept of two key things: Mindset and mechanism. Consider how to define unscheduled time over which workers have autonomy. Additionally, think about how to change processes that produce unnecessary work. Some of their ideas include:

• Leadership mindset: leaders can resist the instinct to fill every minute of work time with new tasks
• Outdated or unexamined processes: scrutinize “things that have always been done that way” that live on in your company into well past their usefulness
• Collaboration overload: video conferencing makes meetings easy to schedule, but it’s worth asking if every interaction requires that level of collaboration

Offer Scheduling Flexibility

Flexible work schedules are highly sought after in the post-COVID labor market. Building flexible schedule options into your labor pool gives employees more control over their work time, decreasing absenteeism and improving retention. Not all flexible work schedule types will work with every business, but here are some options:

• Compressed workweeks: this allows employees to work longer hours per day to shorten the work week; common in health care with 12-hour shifts
• Customized working hours: a split shift is a common example; someone may take a midday break of two hours or more (beyond the mandated lunch break) and return to the office for another block of work time
• Alternative schedule: an employee could work a night or weekend shift (more common in businesses without those shifts as a usual option)
• Hybrid or full remote: employees work part or all of the time at home
• Part-time: reclassifying a full-time employee to part-time to accommodate their life needs

Implement Workforce Management Solutions

Once you implement ideological solutions to reduce overtime, workforce management software will be the most important tool in your box. Without workforce metrics, your organization faces blind spots that blur the overall picture of how to best manage labor hours. WorkforceHub offers solutions for scheduling and time tracking, along with tools that help managers keep an eye on hours and other critical metrics. It’s easy to set up notifications when employees are approaching overtime to avoid blasting your labor budget with unplanned OT. Explore how this time and labor system can transform the way you manage your employees and keep the business on track. Try it for free!