Should I Pay Overtime or Hire More Staff?

Should I Pay Overtime or Hire More Staff? If you're a small business owner, the decision of whether or not to pay overtime or hire more staff is one that you'll likely have to make at some point. Here are a few things to consider when making your decision.

Analysis of Overtime Expenses: A Strategic HR Step

Analyzing overtime expenditures can be a crucial strategic step in selecting when to hire additional employees and how to increase operational efficiency, labor costs, and productivity.

More Hires vs Overtime

Examining the costs of extra vs the costs of employing extra staff is an important method for making employment decisions. These expenses will fluctuate depending on the employee's income and other considerations.

Here are three methods to help you decide if it's better to pay current staff extra or hire new personnel.

1. Calculate the operating expenses of hiring a new employee.

A yearly cost for medical insurance, pensions, paid time off, as well as other paid leave required by federal law or through a company's policy may be included in those expenditures. Multiply the daily pay rate of the potential employee by the entire number of paid vacation days that are entitled to every year. Regardless matter how many hours a person works, fixed costs remain the same.

2. Calculate the Costs of Overtime Pay

If an employee earns $15 per hour, your company will pay them about $600 for just a 40-hour workweek. If an employee's usual rate on pay is $15 per hour, they are entitled to half pay for all hours worked beyond 40 in a workweek, or $22.50 per hour, underneath the FLSA. If that person works an additional ten hours each week, you'll have to pay them $825 in weekly wages. These really are variable costs that do not include any state overtime requirements, which might be considerably more generous to workers.

3. Analyze the Data

If you simply require 10 more hours from a $15-per-hour employee, the cost of employing a new employee and paying the set staffing costs for a new individual may not be worth it. However, at some point, hiring a new employee — albeit part-time — will be less expensive than continuing to pay for overtime hours. Determine your company's break-even point by examining the fixed and variable expenses of employing new employees plus paying the current overtime.

Making Strategic Use of Overtime

Many firms use overtime to compensate for employee absences or to allow employees to make up for lost hours. Rather than relying on overtime to make up for a lost time, organizations can benefit from being more proactive and assessing overtime expenditures. Consider how you might use overtime strategically, in the long run, to satisfy production demands at specific times of the year or to fulfil unusually big orders.

Leaders can instantly access a lot of data and exploit it to keep the costs down with an integrated, fog HR solution. Here are a few smart strategies you may take to improve your overtime utilization:

Calculate your current use. Investigate your internal statistics to see which staff or departments work the most overtime and why. Most current systems help generate reports fast that show which workers work the most extra, what divisions work the most overtime, and how much these additional hours cost the company. HR directors can gain valuable intelligence & make effective decisions by analyzing that data and having talks with managers in critical departments.

Ensure that policies are stable. Once you know how your company now utilizes extra (and how much it costs), you can use that information to create a long-term overtime policy. Suppose particular departments appear to be overusing over time, for example. In that case, you may establish standards allowing them to utilize overtime only during peak months or putting a cap on the number of overtime hours work gets done in a month or quarter. Determine which positions require overtime and only authorize it for those ones by assessing existing overtime usage. You'll be able to make better use of overtime and save money by avoiding its misuse. You should also have standards in place that require staff to acquire written approval before working overtime so that you can better control it. Even yet, employees who work extra without authorization or exceed the cap must be paid for all worked hours.

Employees should be cross-trained

To reduce misuse of overtime when workers are absent, consider cross-training personnel. When essential personnel are unavailable, staff who generally work in different areas can assist with specific initiatives.

Find a happy medium. While many employees value the extra pay that overtime provides, they also require sleep as well as the ability to schedule things from outside work. Even if some extra hours are required or incorporated into the work plan, make sure that the majority of extra hours are discretionary so that employees do not feel obligated to stay and morale is not harmed. Also, handle employees that have a lot of absences ahead of time.

Overtime isn't only a last-minute solution to a problem. It can also help you to manage costs and boost output if utilized correctly.

Which makes more sense: working overtime versus hiring more people?

Even when you do everything you can to establish efficient, cost-effective procedures and technology, making a firm successful takes a lot of man-hours, no matter how you slice it. If tasks are left unfinished after your workers have worked a regular 40-hour week, you can either allow the workers you've hired to work overtime or hire more people. Which choice you choose is determined by a number of factors.

Is there a lot of overtime involved?

On the face, this appears to be a straightforward task—a few hours won't usually be enough to justify the expense of finding, hiring, and training a new employee. However, at some point, you may find yourself paying more extra than what you would if you hired someone new. As a result, you'll need to estimate how so much work will be possible in the future. If your company is growing quickly, it may be good to hire someone part-time and gradually raise their days as your needs grow.

What kinds of tasks are you looking for to be completed?

In most firms, the standard procedure is to hire people to accomplish certain activities, but as time passes, you may find that reorganizing roles makes the job more effective. The goal is to speak with and monitor your employees closely enough to figure out how to best utilize each of their abilities. However, as businesses grow, restructuring may not be enough to meet all of your needs. In these situations, it's generally preferable to hire actual experts who can devote their complete attention to the responsibilities you expect to continue far into the future.

What is the degree of stress among present employees?

If your company's work is mentally demanding, such as analysis tools or healthcare, or if it demands a level of physical stamina or stamina, requesting current employees to work extra could have a negative impact on morale, concentration, and production. Worse, it could put your employees' or clients' health or safety in jeopardy. Increased sick days, blunders, and human relations issues might all signal that your employees require assistance, even if they are too proud or afraid to say it.

What is the state of your cash flow?

When your business grows, it's tempting to expect more sales and hire new employees, assuming that those sales would cover their salaries, benefits, taxes, licenses, and other costs. But what if your sales don't turn out to be as spectacular as you had hoped? If you can't promise that you'll be able to cover a salary and everything that comes with it, you should keep the people you have, even if it means rewriting some of your procedures or equipment.

How are you faring in terms of innovation?

With strong leadership, your staff should be continuously presenting ideas to the table. If you and your coworkers are stuck in a rut, bringing in a fresh person to manage the extra hours could be precisely whatever you need to revitalize the workplace.

Are you someone who enjoys interacting with others?

There's no rule that says you have to be a chatty extrovert to be a successful business leader; for example, Bill Gates and Charles Buffet are both introverts. Nonetheless, when you recruit new employees, you will have to deal with the constant queries that will occur as your new employee acquires a sense of how to do their duties. Perhaps more crucially, having someone fresh in the office can substantially alter the company's dynamics. You should be prepared to assist people in adapting to these changes, which often entails dealing with possible disputes face to face.

What exactly does your consumer feedback entail?

You probably don't need to undertake staff changes if your current employees have a great deal of work but also are pleased, can bring in fantastic reviews, and your customers are satisfied. If, on the other hand, your employees are working overtime, morale is low, and customer satisfaction is declining, or if you can't make deadlines even with everyone's nose to the point of pain, it's definitely time to let go of your current personnel and start recruiting.

Are your present employees progressing with the company?

Most employees are willing to put in a little more effort to assist a boss they truly think in, but they must also believe in themselves. They won't be able to achieve this if you never have the chance to succeed. If the quantity of overtime necessary means that your employees never attend lectures, seminars, or take vacations to recharge their batteries, you can ensure that innovation will be minimal to non-existent. If you want your firm to grow and improve in the future, you don't want to go down that road.

Determine the fixed costs.

If you're intending to recruit someone full-time, be sure you know how much it will cost. It encompasses considerably more than just pay. Benefits paid for vacations, incentives and bonuses, taxes, retirement funds, and any other costs associated with full-time employment must also be factored in. Once you've crunched the statistics, you'll be able to determine whether you can truly afford to employ full-time employees.

Calculate the cost of overtime.

Before making any judgments, it's also essential to understand your labor cost. Some businesses will go to any length to avoid paying overtime. However, if you're simply in the middle of a crowded season that will end in a few months, this may be the best accounting and business option for you. Calculate your hourly wage, extra rate, taxes, and any retirement contributions so you understand the exact amount you'll be dealing with.

Consider getting some temporary aid.

Hiring on a short term basis is one method to have the best of all worlds. It is frequently less expensive than renting over time, especially because you won't be paying taxes, benefits, or other employment-related expenses. At the same time, you'll have the extra staff you require for as long as you require it, whether it's a few weeks or months.

Following the engagement, you'll have a clearer idea of if overtime is a viable option or whether you need to recruit full-time. In addition, you'll have a pool of temp employees to choose from who have already been trained and are ready to just go.

Seasonal enterprises are among the companies that demand that their employees work far more hours than they would normally. Although demanding overtime may seem to be the simplest solution, it has drawbacks. Hiring new personnel, on either hand, can be difficult. The solution is to decide on a plan of action on a specific instance basis, especially for small enterprises whose habits can be changed swiftly and simply. Either option comes with both real and intangible consequences.

Conclusion

When your company has extra work to complete, giving your present staff overtime may be a reasonable option. Nonetheless, some situations, such as a lack of cash flow or a high degree of stress, may indicate it's time to get a job somebody fresh. Because no two businesses are comparable, carefully assess your circumstances and base your overtime/hire decision on both short- and long-term objectives.

Do you feel like you are struggling with putting "strategy" and "business growth concepts" in place that make a difference? Doing it all is overwhelming! Let’s have a honest discussion about your business and see if the Power of 10 can help you. Click “HERE” to have a great conversation with our team today.

Written and Published By The Strategic Advisor Board Team
C. 2017-2021 Strategic Advisor Board / M&C All Rights Reserved
www.strategicadvisorboard.com / info@strategicadvisorboard.com