Overtime Management: How to Control Labor Costs Without Burning Out Employees

Labor costs typically account for a significant portion of a business’s budget. With some planning, it’s possible to keep labor costs in check while paying your employees fairly and following federal and state labor laws. Read on for some ideas to help control your labor costs without burning out your employees – your most valuable asset.

Calculate Your True Labor Costs

Labor costs are more than just the hourly rate or yearly salary you pay your employees. Health insurance, retirement and other benefits, payroll taxes, company perks, and other costs all comprise the true labor burden of employing someone. So even though an employee’s negotiated rate may be $25 per hour, the cost to the company is higher.

It’s important to understand the full labor burden of each employee to keep your hiring budget in focus, to plan for future pay raises, or to make difficult decisions about downsizing. To calculate true labor costs, writes HR specialist Joe Mittelman, “add their annual salary or hourly wages, any extra compensation such as overtime at work and bonuses, your share of payroll taxes and mandatory insurance for the employee, and your portion of fringe benefits, such as 401(k) match and health insurance contributions.”

This information helps you make the most informed staffing decisions and avoid knee-jerk responses that can be disruptive to your employees.

Manage Overtime

For some companies, overtime is an expected part of workers’ take-home pay. They know in advance there may be instances where overtime is required and acceptable to the company’s staffing budget. Workers in that scenario plan for and count on the extra money. 

For other companies, overtime may be an indication of staffing or scheduling problems. Workers who unexpectedly work after their scheduled shift to cover for others may experience early burnout, contributing to reduced engagement and increased turnover. Unplanned overtime can eat into the company’s bottom line.

To manage overtime:

1. 1. Create an overtime policy. Share this widely with your team, especially those who make the schedules. Each employee should know if overtime is permissible and under what circumstances they might work beyond their regular hours. The policy should outline how workers and managers should communicate about potential overtime.
   2. Match overtime to demand. A delivery company will likely require overtime hours in the months leading up to the holidays. Hospitals may need overtime during a local emergency. Plan for overtime hours when it’s absolutely necessary to keep the business running smoothly, and manage scheduling more efficiently when the work is less demanding.
   3. Cross-train staff. Where possible, train staff members to handle tasks outside their typical work. This eliminates the need to rely on a single person to handle particular tasks, which can increase overtime. Others can pitch in to carry out required tasks, generating productivity and teamwork. 

Labor Forecasting

Labor forecasting is analyzing historical data, past staffing, and customer patterns to predict how many workers you’ll need for a particular shift. “There are several ways to forecast your labor needs,” writes Sam Lovhaug. “One simple approach involves the following formula:

Labor forecast = (Projected sales / sales per hour) x average hourly wage 

This formula helps estimate the number of hours you’ll need to staff based on expected sales and your team’s productivity rate.”

Forecasting helps you see which shifts are under- or over-staffed and move employees to the higher-demand times instead of hiring additional workers. It shows you where understaffing is overwhelming employees, decreasing risks of burnout and turnover. Understaffing slows down service, and you risk losing customers. Forecasting helps you choose from adjusting shifts, hiring new staff, or employing strategic overtime to follow the patterns of your busiest times.

Stay Compliant

Federal law dictates that nonexempt employees who work more than 40 hours per consecutive 7-day period (week) must be paid time and a half, and some states (Alaska, California, Colorado and Nevada) have daily overtime laws. Even if your company doesn’t plan for overtime, you’re still required to pay the wages if the employee performs the work.

Using accurate time-tracking tools keeps the staffing data at your fingertips, ready for analyzation and adjustment before excess overtime puts a strain on the budget. WorkforceHub includes advanced tools for scheduling, virtual and physical time collection, and shift swapping, keeping you in compliance with federal and local labor laws.

Scheduling enough workers for demand and protecting employees from burnout requires some careful planning and instituting supportive policy. By managing overtime, forecasting labor, and using software tools, you can make actionable steps to stay compliant and keep your labor costs in check.