Overtime not so cost effective

Maybe it is something that you have realized, or maybe you just had that niggling thought, about just how much overtime is costing your business. While i dont want to alarm you, i do want to be sure you know, it actually probably costs more than you think. There are a number of different things to take into consideration, in regards to just how much the cost of overtime impacts your business, and if it can be minimized.

Starting at the top, while maybe it is fairly obvious overtime in general is time and a half after the hours of a standard shift is worked. For example a standard day may be 8 hours, so overtime would start for the ninth hour worked. If the employee is earning $20/hour then time and a half would be $30 per hour. There of course may be some different arrangements in place in some work places but in general this should be the literal meaning of Overtime, and rates will vary from almost every profession and state/country.

The first consideration as to how much overtime costs you though is another cost that is involved. This cost is superannuation. At least for those businesses in Australia, and i would expect in some other places around the world, the superannuation contribution, is a percentage of income. At this time in Australia that percentage is 9%. This means based on the above example that for every hour of overtime you need to pay an additional 90cents. So suddenly that additional hour is now costing you $30.90.

The second consideration comes to when more then one hour of overtime may be worked. Again the example in Australia comes back to many industries once more then 2 hours of overtime is worked a meal allowance is paid. It varies for different industries but lets assume to make things easy that it is $10.00 some are more some are less. Assuming that two hours overtime was worked and this allowance awarded, the additional 2 hrs are now costing you $35.90 per hour.

A third consideration comes in when shift loadings are for working late at night or weekends, is also available. This is where things can get a little tricky and knowing the employment conditions as set out in awards or workplace agreements will certainly come into play. But maybe for example a worker gets a 10% additional loading for working between 9pm and 6am. If in this time they also go into overtime, on the above example rate of $30 (for time and a half as the loading is applied to the overtime rate of pay in this time). Each hour of overtime between 9pm and 6am would incur an additional $3.00 per hour. Or would bring the total up to $38.90 per hour.

The final consideration that you need to make is one that cannot be financially quantified. It really comes down to how productive your employee’s are going to be in comparison to the rate of pay they are receiving. It comes down to a fact that by the time that most employee’s reach the end of an 8 hour shift, they are possibly already not working at 100% of their ability. So often the longer they are working the less productive they are going to be. This is going to vary for every employee, however and is hard to gauge as a financial figure.

Really at the end of the day what this all comes down to is that time and half, costs you more then you think, and when you get to double time and other high rates of overtime pay, it gets even worse for the balance sheet. This is not to say that overtime should not be used however it is something that can cost you considerably. The best solution is to be aware of what it is going to cost you and to work towards minimizing the impact as much as possible.

One hour of overtime, could almost pay for a two hours at normal time, and it would take just 21 hours of overtime to pay for one additional person at normal time.

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