How to Calculate Employer's Cost of Overtime

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Calculating the cost of overtime is not a relatively simple exercise. State and federal regulations, negotiated contracts and individual employer benefit offsets and premium rates all can affect the ultimate rate of pay for overtime. Computing the cost of overtime accurately allows the employer to make an informed decision about the most cost-effective method for performing work. In some cases, overtime may be cheaper than hiring a new member of staff, whereas in other instances, increasing he workforce will provide a greater return on investment to the company.

Identify the number of overtime hours the employee worked during a particular week. Typically, this will be any hours worked over 40 in a workweek. Check any applicable union contracts or policies to determine if any non-worked hours count toward overtime eligibility -- for example, some contracts allow vacation and/or sick leave to count as hours worked for the purposes of calculating overtime.

Review state and federal legislation, such as Industrial Welfare Commission orders or the Fair Labor Standards Act, to determine if a particular overtime rate is mandated by law. For example, in California the law typically requires employers to pay time and a half for hours worked in excess of 8 but up to 12 in a workday, and double-time for hours worked over 12 in a work day.

Determine what will be included in the overtime rate. Some premiums and bonuses may be included -- this will depend on your policy and the qualifying reasons for the bonus -- and others will not. Benefits costs are not included.

Compute the rate. For example, an employee earning $10 per hour, who works 13 hours in a workday, five of which are overtime eligible, and who does not have any overtime eligible premiums will have the following overtime cost in California: 4 hours at $15 per hour, and 1 hour at $20 per hour for a total of $80 total overtime cost to the employer.

Calculate, for example, if the overtime costs the employer more than hiring additional staff by comparing the regular rate of pay with benefit roll-up; vacation, sick, retirement and social security costs to the overtime cost. A typical private sector company has a benefit roll-up of 0.35 percent, whereas a government agency might have a benefit load of 0.59 percent. Therefore, hiring an extra worker to perform the five hours of work would cost the private sector company $67.50 -- a savings of $12.50 compared to paying for overtime -- but the government agency would pay $79 for those same five hours, only saving $1. If the overtime was minimal -- only paid at the time and a half rate -- it would actually be cheaper for the government to pay for overtime than hire new staff, even if the overtime was an ongoing obligation.

Tips & Warnings

  • Overtime law is complex, and penalties can be costly. If you are in doubt about legal overtime obligations, consult a lawyer.

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