If you stop paying attention to overtime at your company, you’ll probably end up with some bad results—like employee burnout from working excessive hours, unauthorized overtime, and surprise spikes in labor costs that quickly boot you out of your payroll budget.
Overtime management is necessary to avoid these scenarios. And it can save your business a lot of money.
Assuming that even one employee earning $30 an hour gets five hours of overtime every week, that’s $225 more each week than you’d pay for that employee’s regular hours. By eliminating those overtime hours through overtime management, your company saves at least $900 a month.
Imagine the potential savings when you reduce overtime for multiple employees. Plus, your employees might enjoy having more free time.
Keep reading to learn overtime management tactics and common mistakes businesses make when handling overtime.
6 Tactics for Overtime Management
1. Create a clear overtime policy
Businesses that have trouble controlling overtime probably don’t have a clear overtime policy, or if they do, they don’t give the policy enough weight.
Overtime can quickly get out of hand when it has no boundaries. An overtime policy gives it those boundaries with company-wide rules to follow. A good overtime policy should address the following questions, plus any that might be more specific to your company:
- How does the company define standard and overtime hours?
- What are the definitions for exempt and non-exempt employees?
- How is overtime calculated at the company?
- Is overtime mandatory?
- Is overtime capped?
- How are overtime hours distributed?
- Does overtime need to be approved by management?
- Can employees be rewarded for efficiency during regular hours to reduce overtime?
- How does your company track overtime hours?
- What are the penalties for overtime abuse?
With a policy covering all overtime situations, everyone at your company should be on the same page about company rules surrounding overtime, so you shouldn’t need to make ad hoc overtime decisions with unfair results.
You could also avoid payroll compliance errors stemming from overtime mismanagement. The last thing you want to do is to have to give retroactive pay and potentially pay penalties for not managing overtime correctly.
2. Track Hours and Schedules Accurately
Automatic time-tracking software is one of the best tools you can implement in your business, even if you don’t allow overtime. But with overtime, it’s 100% invaluable to have a time-tracking tool on your side. Some of the best payroll services include time-tracking.
Most time-tracking tools help you track any time you need to, from standard hours to shift differentials and, of course, overtime. You tell the software your overtime parameters and rate, and it automatically tracks how many hours each employee has earned and calculates their base pay and overtime pay for that pay period.
Plus, you can get alerts when an employee is close to reaching their overtime cap so you can adjust schedules accordingly.
I suggest looking for a time-tracking tool that also includes labor forecasting and employee scheduling, which I discuss further below.
3. Forecast Your Labor Needs
It’s natural for companies to have ebbs and flows. Depending on your business model, you might be busier during some seasons than others or experience dips or peaks based on weather, consumer demand, or holidays.
For example, tax offices are busiest from January to April, while the demand for landscapers increases in spring and summer.
Other businesses aren’t as predictable and may experience several highs and lows throughout the year.
The good news is that labor forecasting software can work for practically any business, predictable or not. It learns past labor and demand trends for a company using machine learning models to help you determine when you might need more or less labor, potentially reducing wonky scheduling leading to unnecessary overtime.
4. Offer Flexible Scheduling
Although some businesses operate best when their employees work a typical 9-to-5 schedule, not all companies need to keep their workers in that box. In fact, you could be promoting excessive overtime if you do.
Flexible scheduling is a better option in some cases, and here’s why.
Say you have five employees all on a 9-to-5 schedule. During the first part of the day, two of those employees do some smaller tasks, like checking emails, organizing files, and holding appointments or meetings.
However, their day often picks up after lunch, as their clients are more active in the afternoons and early evenings. This causes them to stay over their scheduled times two or three days a week, sometimes accumulating up to ten hours of overtime between them.
Allowing these employees to have flexible schedules—in this case, 11-7 or 12-8 might work better—so they can adjust to meet their clients’ needs could help you avoid overtime, or at least make it a little more predictable when it’s needed.
5. Cross-Train Workers
A well-rounded team can fill in skill gaps when needed, like if someone calls off for a family emergency or you’re in between hiring someone to replace an employee who retired. But it’s also essential to have at least a few employees who can manage critical tasks to avoid unnecessary overtime and burnout.
For example, say you have just two employees who manage inventory every week. If one is out for the week due to illness, the other worker is left to shoulder that full responsibility. Not only can this cause burnout, but it could also lead to unnecessary overtime when your worker basically needs to do the work of two people.
If you have other employees cross-trained in inventory management, they can hop in to cover the absent worker’s tasks.
With more employees skilled in multiple areas, you may need less overtime in general.
6. Reward Efficient and Productive Employees
Employees who routinely hit their goals and complete their tasks while doing what they can to avoid overtime should be rewarded. Consider quarterly bonuses, extra time off, or a remote day earning system as rewards.
When employees see that efficiency gets rewarded, they could be less inclined to shoot for overtime. Get your managers on board to monitor and identify productive employees, or use time-tracking software to get an overview of your most efficient workers.
3 Overtime Management Mistakes To Avoid
The Fair Labor Standards Act (FLSA) establishes overtime laws. If your business is subject to the FLSA, it’s also subject to overtime laws.
Making a mistake when managing and tracking overtime could lead to unpaid or incorrectly paid overtime wages, which carries a penalty of $1,000 per occurrence plus back wages. In other words, it’s not something you want to mess with.
Avoid the following overtime management mistakes.
1. Failing to count travel time
The FLSA states that an employee who is required to travel during their normal work hours should be paid for that time. If an employee’s travel time causes them to have overtime hours, you’ll need to pay overtime for those hours beyond 40 during the week.
So, if Mary has to travel to another office to pick up files before taking her lunch break, that travel time needs to be included in her work hours. Similarly, if Ben is required to drive two hours away for a company meeting, you must include his four hours of overtime and the time at the meeting in his pay.
Even if an employee drives five minutes down the road, it’s paid time if it’s business-related travel time.
Not including this time in your employees’ pay can put you at risk of the FLSA penalties I mentioned and lead to some unhappy employees and, as a result, high turnover.
Your company should have a payroll budget. Factor travel time into your budget as soon as you know you’ll need it, and leave a cushion for potential overtime. If travel time is a normal occurrence at your company, it should be a regular staple in your payroll budget.
If an employee is scheduled for lengthy travel time, you may want to see if there are other ways you can reduce their hours during the week to lower your overtime costs.
2. Not realizing that some states differ in overtime laws
Each state can make its own overtime laws as long as they meet the minimum requirements under the FLSA.
For example, employees in Hawaii earning a guaranteed wage of at least $2,000 a month are exempt from overtime pay. Kentucky operates on a 7th-day overtime law, requiring employers to pay overtime for all hours an employee works on the 7th day if they’ve worked all seven days of a workweek.
Five states have overtime laws that differ from FLSA overtime laws. In addition to Kentucky and Hawaii, these are Alaska, Colorado, and New York. If you operate in or have employees in one or multiple of these states, you must follow their laws to avoid state penalties.
3. Misclassifying exempt and non-exempt workers
An exempt worker is not required to receive overtime payments under the FLSA, but non-exempt workers do. The FLSA defines an exempt worker in Fact Sheet 17A. Generally, employees must need to be making a minimum amount each week or be paid a salary that equates to that minimum amount.
It’s important not to misclassify your employees as exempt or non-exempt if they’re actually the opposite. Classifying a non-exempt employee as exempt can have especially hefty consequences, as it could lead you to not pay overtime to someone who’s eligible for it.
Have an experienced payroll specialist review each new hire and their employee-employer agreement to determine their status before they begin working.
It’s Not Too Late to Start Managing Overtime Properly
Whether you’re just starting out or have been in business for five years with no overtime monitoring, it’s never too late to get overtime under control. Proper overtime management can save you legal troubles, costly labor spikes, and unhappy employees—all excellent reasons why you should be proactive about setting overtime boundaries.
The best way to keep track of your overtime hours? Get payroll software, preferably one with detailed time tracking that monitors employee productivity and efficiency. It can also update you with your payroll costs to help you adjust your budget.
