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Hire More People or Require Mandatory Overtime: Which Is Better When?

written by: N Nayab•edited by: Jean Scheid•updated: 6/21/2011

Deliberating the trade-off between increased headcount vs. overtime to address increasing workload issues requires considering issues such as the applicability of overtime laws, the pros and cons of overtime, the benefits of increasing headcount, and the sustainability of the increased workload.

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    Legal Basis

    Hire More People or Require Mandatory Overtime? The Fair Labor Standards Act (FLSA) stipulates overtime wages at a minimum of one-and-a-half times normal wages for employees working in excess of 40 hours a workweek, but does not require extra pay for work on weekends, holidays, night work, or regular days of rest unless such work counts as excess of the weekly 40 hours. The pay for calculation of overtime wages includes bonuses, and cashing out leave, but excludes any payments not part of the regular rate, any expense incurred by the employer on employees behalf, premiums paid for holiday work, discretionary bonuses, and payment as gifts.

    The FLSA excludes employees employed as executives, administrative, professional and outside sales employees, and certain computer employees all earning above $455 a week for eligibility to overtime wages. Such exclusions render about 50 million out of 120 million American workers exempt from overtime laws.

    Some states have enacted overtime laws that may offer better overtime rates or include more employees in the net. For instance, California state law requires employers to pay double the normal wages for employees working more than 12 hours on workdays or more than eight hours on the seventh consecutive workday of a single workweek. In addition, agreement with an employer and an employee or unions may stipulate anything excess or cover more rules for employees and overtime wages.

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    How Overtime Benefits

    Organizations faced with extra work may require employees to perform overtime. Such overtime increases the employees take home pay, and motivates people who work primarily for money. It may allow the employee to finish more and thereby, secure a sense of accomplishment, and lead to favorable performance appraisal ratings and accelerate promotion or pay hikes.

    From the organizational perspective, overtime apparently helps in cutting costs, especially when the employees remain exempt from overtime stipulations and the company has no agreement in place to pay overtime. Overtime allows eking out more work from the available infrastructure such as office space and consoles, computers, software license, and more, as the staff working longer hours uses the same resources. This increases the rate of return and utilization ratio of the infrastructure. Hiring new staff requires arranging for a new infrastructures as the new staff works simultaneously and alongside existing staff. Overtime also helps reduce new employee hiring and training costs considerably.

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    How Overtime Harms

    Organizations that make covered employees work overtime lose out directly, for overtime entitles them to one and a half times normal wages inclusive of most benefits when another employee could do the same work for normal wages. Still better, temporary, or part time workers could do the work at wages much less than what a normal employee attracts. The deciding factor in such cases is the cost of hiring and training versus additional cash outflows for overtime wages.

    However, regardless of overtime wages, organizations lose out when employees perform overtime. The U. S. Department of Health and Human Services report that 16 out of the 22 major studies addressing general health effects associates overtime with poorer perceived general health, increased injury rates, more illnesses, and increased mortality. Two studies associated overtime with unhealthy weight gain, another two studies associated overtime with increased alcohol use and smoking levels, and another study associated overtime with poorer neuropsychological test performance. The same report also reveals employees in a state of decreased alertness and increased fatigue between the 9th to 12th hours, resulting in lower application of cognitive faculties, decreased vigilance on task measures, increasing chances of errors and accidents, and more.

    Employees who work overtime also tend to get less sleep, and remain more susceptible to cardiovascular and gastrointestinal disease, diabetes, and musculoskeletal conditions. They also face work-family imbalance. All these negative conditions directly affect work performance, lowering productivity, increasing absenteeism, and reducing the quality of work output.

    An article by Michelle Rafter “The Yawning of a New Era" published in Workforce Management Magazine in December of 2010, documents facts about the rise of human fatigue in the workplace. It mentions a case of nurses’ work hours at Allegheny General Hospital in Pittsburgh Pennsylvania where the company, to cut costs, requested nurses to work overtime. This led to fatigue and higher sick leave incidences, leading to a vicious circle of high overtime levels. The company stopping the overtime policy ended the vicious cycle.

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    The Verdict

    Increasing headcount allows the employer access to a wider and diverse talent pool, providing more flexibility. A 2004 Unscheduled Absence Survey by CCH Incorporated revealed conditions with the highest rate of overtime also have the highest rate of absenteeism, and unscheduled absenteeism costs US employers $3,600 per hour owing to work held up.

    The decision on increased headcount vs. overtime ultimately depends on whether the increased workload would sustain over time or is a seasonal or one-off spike. The ill effects of overtime are long term in nature, coming when an employee works overtime on a sustained basis. When the increased workload does not sustain beyond a period, both employees and employers may reap the benefits of overtime such as higher wages, saving on recruiting and training new hires, higher asset utilization ratios, and more. Moreover, increasing headcount when the extra work is a passing phenomenon leaves employers deliberating over what to do with excess employees when workload returns to previous levels.

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    References

    1. United States Department of Labor. “Wages-Overtime Pay." http://www.dol.gov/whd/regs/compliance/whdfs23.pdf. Retrieved June 19, 2011.
    2. Susan L. Koen. "Bare-Bones HeadCount & High Workforce Fatigue Create a Downward Performance Spiral & Increased Costs." http://timedrivenperformance.com/2011/03/16/bare-bones-headcount-high-workforce-fatigue-create-a-downward-performance-spiral-increased-costs/. Retrieved June 19, 2011.
    3. Circadin. “Absenteeism:The Bottom Line Killer." http://www.workforceinstitute.org/wp-content/themes/revolution/docs/Absenteeism-Bottom-Line.pdf. retrieved June 19, 2011.
    4. U. S. Department of Health and Human Services: Overtime and Extended Work Shifts:Recent Findings on Illnesses, Injuries, and Health Behaviors." http://www.uscg.mil/hq/cg5/cg5211/docs/NIOSH_ShiftWorkStudy.pdf. Retrieved June 19, 2011.

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