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The Real Cost of Overtime

By: Ruth King


Can you generate $14,352 to pay for one overtime hour every week? Or, looking at it another way, is paying one hour of overtime per week worth $4,784? Overtime is expensive. Here’s what it really costs.

If you pay an employee $16 per hour, then one hour of overtime is $24 per hour or $1,248 per year. Then you must add payroll taxes and worker’s compensation costs to the $1,248 per year. Other benefits such as health insurance are not dependent on hours worked. They are a fixed cost each month and this cost is usually accounted for in the 40 hours of regular time paid each week.
The cost for payroll taxes and worker’s compensation insurance are 15% of the hourly rate for office employees. It is about 20% for field employees. However, let’s assume that you are paying an office worker the one hour of overtime. The real cost for that office employee is $1,248 plus 15% of $1,248 or $1,435.20.
That doesn’t seem like a lot until you calculate the revenues you need to generate to pay that one hour of overtime. Let’s assume that you want to generate a 10% net operating profit. The revenue you must generate to cover that one hour of overtime for the office employee is $14,352!
Using the same calculation method, the revenue you must generate to cover that one hour of overtime for the field employee is $14,976!
Of course, if, by paying that one hour of overtime each week, you can generate the extra almost $15,000 in revenues, then you will gladly pay it. If you can charge your customers for that overtime, then you will gladly pay it. This is probably the case for a field employee, i.e. an employee who generates revenue for the company. It is probably not the case for an office employee (one who does not generate revenue but supports those employees who do).
If your office employees are on salary, you may still have to pay overtime. Check with the Department of Labor in your state.
Look at your payroll each week. If your employees are consistently receiving an hour or two of overtime each week, then make them justify the additional hours. They might have “gotten used to” the additional money and are finding a way to stretch their time to receive that extra income each month.
Are they spending time on social media activities on company time? Are they texting or talking on their cell phones on personal business rather than company business? If either of these activities is occurring, they are stealing time from your company.
One way to determine whether your employees are productive is to divide the total payroll plus payroll taxes (FICA, medicare, Federal and State Unemployment expenses) paid for a month by the total revenue for that month.
This is your company’s monthly productivity ratio and answers the question, “How much am I paying in payroll and payroll taxes for each dollar of revenue coming in the door?” If your compensation percentage is 42%, then for each dollar that is coming in the door you are paying 42 cents in payroll and payroll taxes.
Different types of businesses have different average productivity ratios. Service businesses have higher ratios (usually greater than 50%) than do manufacturing or construction businesses (usually less than 30%). Calculate this ratio for your company over several months. You’ll know what the average is for your company. Then track the productivity ratio each month and report the results to your employees. You’ll find that it will decrease because it is being watched and reported. A decreasing productivity ratio generally means more profitability. You might want to share the additional profits with your employees. This is one way to keep the ratio as low as possible.
Cutting hours may also increase productivity. One company owner cut all of his office employees’ time from 40 hours per week to 30 hours per week when the economy turned down. He was amazed that the same amount of work was getting accomplished in those 30 hours per week that had been accomplished in the previous 40 hours per week. At that point he realized how much his employees had been “stretching their time.” They had been unproductive for 10 hours per week or 25% of the time that he had previously paid them for.
Whether you pay hourly or by salary, overtime is expensive and often not worth the expense. In most cases your employees should be able to complete their work in the 40 regular hours each week.
Published: January 24, 2014

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Ruth King

Ruth King is a serial entrepreneur, having owned seven businesses in the past 30 years. Ruth has been instrumental in helping business owners understand and profitably use the information generated from the financial segment of their businesses. Recently, she was the instructor for ICE, the Inner City Entrepreneur program in conjunction with the Small Business Administration. Ruth has written many manuals and books, and she was the 2006 USA Best Books Winner for Entrepreneurship and a finalist for the Independent Publisher Awards (IPPY) for her first book, “The Ugly Truth About Small Business.” Her best-selling book “The Courage to be Profitable” was published in 2013.

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