If you’re not careful, you may get a little depressed when you think about keeping your company viable. You may feel like there aren’t many alternatives left. At this point, you’ve probably already cut expenditures everywhere you can find room—from office supplies, advertising, and incentive awards to insurance premiums. What’s left when everything has been cut?
Some companies (maybe yours) turned to cutting payroll expenses. As things begin to ease up and more work comes in, adding staff seems like a risk. At the same time, though, there are more widgets to process, which means more work hours are required.
But if the economy bounces a few times, as some predict, managers worry they will once again be in a position where they are forced to reduce staff. Better to ask (or require) employees to work overtime.
Hold up, says William Davis of Circadian, a company specializing in helping employers and employees deal with the realities of 24-hour, 7-days-a-week operations. Regularly working overtime may not have the effect you seek and, in fact, it could have unintended consequences.
Circadian® (www.circadian.com) is named for circadian rhythms, those functions in the body that regulate our 24-hour cycles, Davis explains. “There are 250 biological functions that have about a 24-hour cycle to them,” he says.
“They are controlled by the biological clock in the brain. A quick example—our core body temperature between about 3 a.m. and 5 a.m. is lower by about 2.5 to 3 degrees than it is during the day.”
It’s fascinating stuff, but you may be wondering what it has to do with payroll costs. Davis segues into the topic. “In struggling economies, it is very common that employers hesitate to add to their workforce,” he says.
“They believe they are saving money by using existing workers for overtime work instead. But they may not be. The difference in cost between overtime and hiring people is really the cost of benefits and of training time to get them up to speed.”
Cost Difference Is Benefits Package
In most circumstances, explains Davis, overtime hours are compensated at 150 percent of straight-time hours. “If you need 10 people to cover all of your work stations, and you only have 8, you need to either hire people or pay for overtime hours. Hiring somebody will cost you for the time and for the benefits package.
“Quite often, the benefits package doesn’t come to 50 percent of the hourly rate for an employee. If you take a look at the benefits package, and it comes to 38 percent, for example, then it actually costs more to pay the overtime than it would to hire an employee.
“Even in cases where the benefits package does cost 50 percent of the pay rate, it doesn’t save the organization much money to use overtime instead of hiring,” Davis continues. “What it can cost the company in terms of fatigue—the safety, quality, and productivity issues that can come with fatigue—can cost much more.”
The ‘Rule of 50’
Davis says the ‘Rule of 50’ is important. This rule is about diminishing returns on overtime work. “I’m thinking of one study in particular that had to do with employees working in refineries,” he says.
“They’re used to working some pretty long and hard hours. But even for them, the studies show that after about 50 hours a week, you’re not going to get a straight-line productivity curve.”
A machine, he explains, produces twice as much in 80 hours as it does in 40 hours. “But the human machine is not linear. After about 50 hours in a given week, people start to plateau, so you don’t get as much bang for your buck by working people more than 50 hours a week.”
Even more important may be the negative effects of too much work in a short period of time. A range of negative health effects are possible, and tired employees have a much greater potential for making critical errors.
As technology has decreased the number of employees and increased the cost of equipment, the potential loss for a single bad decision, made in the middle of the night by an employee who is overtired, has grown considerably.
Davis cites an example: “Let’s say there is a steel mill that used to employ 10,000 workers. Now they have 5,000 employees producing more than before because a lot of the work is being done using computerized systems. The employees are taking on more of a monitoring role because the processes are automated.
“The per-dollar value that is the responsibility of each employee has also exploded over the years. So now, if you have an employee who is essentially drunk with fatigue who makes the wrong decision at 3 o’clock in the morning after working 68 or 70 hours in a week, the cost to the company of that one employee’s error is apt to be much greater than it would have been before.”
So, how much overtime is too much? Maybe your workload requires extra hours, but not enough to warrant another employee. “Our recommendation, from a health-and-safety standpoint, is to try not to exceed 7 percent to 10 percent more than the standard work week of 40 to 42 hours,” Davis says.
Correct Levels Reduce Unnecessary OT
Some companies staff positions based on the assumption that all employees will be at work when they should be, every time, Davis says. That idea can lead to unnecessary overtime.
“Companies should conduct a staffing-level analysis, looking at all the reasons an employee who is scheduled to be at work is not there. For example, if you consider vacation time, you might put that into the mix and decide that, for a 10-person work station you need to have 10.2 employees to cover it. That would take care of the regular work and the various reasons people aren’t there.
“There is a floor level of staffing, and if you staff to that floor level, you can take care of any aberrations with overtime. Normally, you’ll find there is a higher level of illness in the winter months, and vacations in the summer months.
“Do that kind of statistical analysis month by month for a couple of years, and you can establish the proper level of staffing.”
What if your employees are used to working overtime to the point where they consider overtime hours part of their regular pay? Davis says that, much like quitting smoking, don’t go cold turkey.
“We call it golden handcuffs,” he says. “People get used to the additional money. If you hire people and reduce the amount of overtime to make things safer and more healthful for employees, they’re going to be a little bit resentful. Try to gradually increase staffing and reduce the overtime.
“We often look for the short-term dollar,” Davis summarizes. “We don’t want to add to our payroll, but what is the real difference in cost? As we’ve discussed, hiring versus overtime is about a wash when it comes to payroll costs.
“But when you talk about the errors that are associated with fatigue due to excessive amounts of overtime, the difference can be significant.”