Why overtime happens and how to avoid it

Overtime pay is federally mandated: after an employee has worked 40 hours in a workweek, you have to pay them one-and-a-half times their normal rate for the extra hours of work. Though mandatory overtime is legal, this is not an ideal situation for anyone. Workers are tired, and you increased your labor budget without gaining anything.

Unfortunately, a genuine problem exists if overtime costs are a significant part of your labor budget. And it almost certainly relates to the way you manage your employee scheduling.

6 Common ways that overtime payments occur

1. Poor use of resources

The key to a great work schedule is to allocate your best resources first and work downward. This means that senior full-time salaried employees – those who work close to 40 hours and receive the highest hourly rate – should be the first ones to go into the schedule, and then you allocate those on lower rates. Part-time staff go in last to fill any remaining gaps. This approach reduces the risk of your best-paid people accidentally crossing the 40-hour limit and experiencing a severe burnout.

2. Inadequate demand planning

You have the perfect schedule, but your business experiences a sudden surge in demand. Now you need to call in people to help out, even if that means paying overtime hours. Sound familiar? You can avoid understaffing by examining historical data and fine-tuning your demand forecasting to predict exactly how much staff you need in each slot. To do this, you will need to keep detailed records, including accurate schedules that show who you originally scheduled to work each shift and who you drafted in to meet demand.

3. Ineffective time management system

Deliberately or not, employees can often clock in and clock out when they’re not supposed to. Even if it’s a few minutes early or a few minutes late, this can add up over the space of a week and push them into overtime territory. It’s estimated that extra time accumulated by early clock-ins can cost businesses an average of $100 per month per location. Good management plays a role here, but you can’t watch over every single time entry.

Managers need backup in the form of intelligent shift scheduling software, such as Homebase, which prevents clock-ins that don’t align with the schedule.

4. Lack of communication

In an age of smart devices, there is no excuse for poor communication among a team. It should be easy for employees to arrange shift swaps, and for managers to pass out schedule amendments. However, this isn’t always the case. Communication breakdowns can lead to missed shifts or unnecessary show-ups.

It can also cause you to call in people on overtime rates when you could have assigned the shift to someone who hadn’t crossed the 40-hour mark.

5. Not having enough staff

Some small business owners provide regular overtime shifts every week to employees. Often, it’s the only way they can get their schedule to work. It always means one thing: there aren’t enough people on the team, or there aren’t enough trained in certain processes.

In the long run, it’s always best to address the staffing shortage, either by upskilling other team members or by bringing extra people onboard to avoid excessive overtime. Even hiring a part-time employee can sometimes help increase productivity more than making a full-time employee work a 50-hour week.

6. Absenteeism

When people don’t show up – or quit entirely – they inevitably throw the rest of the schedule out of whack, which often results in unexpected overtime payments. Absenteeism has a number of causes, including poor scheduling. Make sure you understand your employees’ needs and don’t schedule them in conflict with their other commitments, such as education or childcare.

How to avoid overtime

You can’t avoid employee overtime entirely. Life happens, and there will be unforeseen circumstances when you have to ask someone to pull more than 40 working hours in a week. However, this should always be the exception rather than the rule, and good scheduling should help you keep overtime as close to zero as possible.

To avoid paying for overtime, we recommend that you start:

• Better allocating your resources
• Improving your demand planning and forecasting practices
• Using a shift scheduling software
• Streamlining communication with and between your employees
• Addressing staffing shortages
• Reducing employee absenteeism

Remember, this is not official legal advice. If you have any concerns, it’s best to consult an employment lawyer.