How to Manage Overtime More Effectively

Use these four expert tips to keep overtime costs down

Amy Bailey, VP of Finance, TSheets.com

Not only does overtime rank as one of the biggest ongoing expenses for most companies, but the correct, or incorrect, management of overtime can mean the difference between expensive lawsuits, low morale, and vulnerability to changes in overtime regulations.

During the recent years of tenuous economic times, many employees have been eager to prove themselves as hard workers who don’t complain about working a little extra time—without necessarily including some or all of it on their timesheets.

Many employers have tacitly, or even explicitly, endorsed this attitude. Ashley Dinsdale, a buyer for Macy’s who works 50+ hours per week, says, “Layoffs happened at my previous employer's office. Now, I get in early and send out emails so they know I’m there.”

Think Proactively

Although overtime is often riddled with expense and pitfalls, it doesn’t have to be that way. Proactively managing your employees' overtime, avoiding surprises and preparing for the future can reduce your expense, protect your company from legal action, and improve morale companywide.

The following four expert tips can illuminate some of the issues with overtime, and help you avoid major pitfalls and surprises when it comes to managing any potential problems.  

1. Track Employee Time. The average American worker, according to the Bureau of Labor Statistics, works slightly more than four hours of overtime per week. That’s 208 hours per year.

Estimating an average wage of $21 per hour time-and-a-half pay, the grand total comes out to $6,552 per employee, per year. With a staff of 20 employees, that’s $131,040 in overtime expenses alone.

What can you do to avoid surprises when it comes to overtime? One of the biggest resources available is mobile time tracking that includes alerts to inform employees and managers when overtime thresholds are encroaching.

Tracking employee time also allows managers and business owners to see and address patterns company-wide, and at the individual employee level when it comes to overtime. Is one employee consistently racking up overtime hours each week?

Does overtime stem from staffing shortages, heavy project loads, or an employee who has extra time on his or her hands and wants the extra pay? With a big picture view of time spent and how it’s allocated to different projects, managers can make informed decisions regarding resources and overtime.

Don’t shy away from tracking hours just for hourly employees. Knowing exactly how many hours everyone contributes is critical to making smart choices and handling potential upcoming federal overtime regulation changes.

Time tracking also avoids timesheet rounding, which typically happens innocently enough but usually falls in the employee’s favor. The American Payroll Association estimates 10 minutes of rounding per shift per employee. Ensure that the system you choose helps you with DCAA and DOL compliance, to protect yourself with easy-to-find records in the event of government audits or labor disputes.

2. Take a Hard Look at Employee Classification. You should be aware that if your employee is salaried but makes less than $23,660 per year, you’re still required to pay overtime, and that this threshold is on the brink of rising sharply.

Not to mention, classifying an employee as exempt with a salary below $23,660 per year or in a position that doesn’t qualify for exempt status simply to avoid having to pay overtime isn’t a sound strategy. A significant portion of the labor lawsuits that have been on the rise since 2004 stem from misclassification and redress for back payments due in overtime for extra hours worked without pay.

For purposes of conviction, it doesn’t matter to the courts whether you’re willfully misclassifying or innocently misclassifying employees; it’s your job as an employer to ensure that classification is correct for your employees and not manipulated in an attempt to cut costs. Penalties for misclassification include up to two years of back payments for overtime owed, and if you’re deemed to have misclassified the employee intentionally, you’ll owe three years' worth of back pay.

To ensure that your classifications are up to snuff, regularly evaluate your employees’ duties and relationship to the company, and consult an attorney in gray areas. It might sting a little to pay the legal fee, but it’s a tiny pinch compared to the potential consequences.

3. Communicate Expectations. One of the best ways to get a handle on overtime is to improve communication around the subject. Make expectations clear to employees, explicitly train managers and employees on expectations, and nip in the bud any employee habits of not recording overtime “out of the goodness of their hearts.”

There may be many unspoken rules about when to record work for hourly employees than managers or business owners realize, but work without pay is still grounds for legal action even if the approval is tacit. And no matter how good your employee's hearts are, work without pay eventually eats away at morale and transparency within the company.

It’s especially important to clarify your expectations around technology. Checking email and expecting employees to respond in off hours can seem innocuous enough, but the minutes add up. Many companies expect employees to be available during off-hours for email communication, but that’s been upheld in court as work. You may be shocked to find how many “hours” your employees are actually logging off hours on this one task alone.

Katharine C. Giovanni, president of Triangle Concierge says, "Everybody is trying to squeeze 36 hours into a 24-hour day. Bottom line, technology is not helping because you can take your office with you. So, we work all the time.” Clarify your expectations surrounding email and then make sure to hold everyone, managers and employees alike, to the standards you lay out.

4. Emphasize Cross Training. In some companies, overtime expenses add up quickly for certain individuals simply because no one else can do their jobs. Not only does the overtime add up, but bottlenecks develop, and some employees’ bandwidth ends up maxed while others’ end up underutilized.

Emphasize cross training as much as possible to spread out the burden and enable different employees to step in with projects as workload increases or emergency situations arise. Effective cross-training can also improve morale, empowering more staff members to contribute on key projects, and relieving some of the burden placed on other staff members.

Cross training can also allow you to be more flexible with scheduling. Too often companies are forced to schedule around individuals with specialized knowledge at the expense of significant overtime. While it’s not possible, or ideal, to cross-train on all duties or skill sets, identifying duties that can easily be learned by several employees can drastically reduce overtime while increasing productivity and efficiency.

Legal Action

Employees worried about their jobs or performance may want to log hours without charging the time. However, businesses shouldn’t see this type of behavior as a good thing. Turning a blind eye or encouraging this type of behavior on the front end can have disastrous financial repercussions later, should those same employees decide to pursue legal action for misclassification or time worked without pay. 

According to the National Employment Lawyers Association, labor and wage disputes have risen 77% since 2004 and not coincidentally, 2004 was the last time the DOL revised the Fair Labor Standards Act. With ongoing discussion of changes to overtime regulations, business owners may expect to see more waves of labor and wage disputes.

In 2014 alone, the Department of Labor ordered businesses across the country to pay almost $241 million in back wages because of employee misclassification as an attempt to avoid overtime pay, asking or encouraging employees to work more than 40 hours per week without pay, or encouraging employees to be responsive to email, texts and phone calls off-hours without pay. From EMS employees in Charleston to healthcare workers in Santa Barbara and managers at sporting goods stores, new lawsuits continue to pop up daily.

About Amy Bailey

Amy oversees all finance, human resource, and building operations at TSheets. She’s a proud Idaho Vandal who spent eight years in public accounting with Coopers & Lybrand, and more than 20 years with both public and private, high-growth technology companies like Extended Systems, ProClarity, Microsoft, and Silverback. She has two children and lives with her husband and an English Mastiff named Scout.