When thinking about overtime, most just look at staying compliant with the federal guidelines established in the Fair Labor Standards Act (FLSA). Violations of FLSA lead to fines and lawsuits, so it is important to perform regular audits. Overtime can also be a costly expense. So it’s also important as apart of your HR metrics to track the actual cost associated with the hours, as well.
How to Calculate
Calculating overtime cost is a useful HR metric for creating a workforce strategy. Overtime can be an effective method for managing business needs if you used strategically.
To calculate overtime cost, determine the timeframe you want to look at. It’s best to look back a full 12 months or the previous calendar year. This will make sure you are accounting for the ebbs and flows of the business. You won’t get an accurate picture if your peak seasons are not included.
Once you’ve determined the timeframe, take the total amount of wages and divide it by the number of people who had overtime hours. You’re left with an average overtime cost per employee.
To be the most beneficial, calculate this metric by month with a look-back period of the previous calendar year. This will allow you to compare your costs month over month, which will be very helpful if you’re not sure when your business peak seasons are.
Analyzing the HR Metrics
Don’t forget to do some analysis once you calculate the numbers. There’s no point to HR metrics if there’s no HR analytics.
A good place to start analyzing is if the overtime costs are validated by the revenue generated. If not, you may want to consider alternative workforce strategies. It may be more cost-efficient to hire temporary staff to assist with the workload. Another option would be cross-training employees so they can assist different teams as needed. Breaking down the cost analysis by teams will help identify where teams can support each other.
FLSA does also provide an alternative method for calculating and paying overtime. Fluctuating workweek method allows for the hourly rate to be calculated differently, but a flat weekly wage must be paid as well regardless of hours worked. Make sure to complete a full analysis of the roles and hours worked before implementing a policy like this.
High overtime costs also correlate to high turnover rates. While some like having the extra pay, too much overtime can leave your employees feeling overworked. This leads to low employee morale and low engagement and it will be difficult to maintain high retention rates.
An HR dashboard that pulls in the data from your time and attendance system (TAS) makes calculating overtime cost a lot easier. It saves time by automatically calculating the data to provide the metrics. Check out our HR dashboard and sign up for a free demo today.