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This article in its entirety initially appeared in the HR Advisor newsletter. We are sharing an edited version on the Workforce Go! website, with permission from the author.

Many business leaders still hold two beliefs about overtime: It’s more expensive than idle time, and keeping overtime below 5 percent is a measure of good management. Neither belief is always true. Instead, the facts argue in favor of a better strategy for identifying and preventing unnecessary overtime.(1)

Yes, there is such a thing as "good" overtime.

Many companies have a line item to track the cost of overtime. This, of course, makes it natural to keep an eye on the amount of overtime taken. But without a full understanding of the best use of overtime, or without a way to track trends in how it’s being used, managers may worry about having any dollars at all allocated to it. They just want to play it safe. The bad news is that this can lead to continuous, unnecessary, and unplanned overstaffing and unprofitable inventory spikes.

The fact is, overtime can often make sense for a large company. Overtime makes good sense when you strategically plan for it to meet unexpected short-term changes in production needs or to manage seasonal or other peaks in demand. The effective use of overtime can create large amounts of flexibility and improved employee engagement. Overtime-savvy management teams can:

Implement labor strategies that allow additional production to be completed on short noticeFlex up to handle spikes in demandProduce on demand and deliver just in time

The results can be better customer service, lower inventory, lower prices, and shorter lead times.(2) For occasional and brief periods, planned overtime actually costs companies less. And instead of overtime having a bad rap, it becomes an effective business tool that will help you achieve your goals.

Employees who work overtime continuously and for an extended period might, in fact, be less productive than their colleagues working a 40-hour week.(3)

It’s the unplanned overtime that hurts.

Paying for more overtime than you had anticipated can be the result of several causes, each with different roots in an organization. Three common reasons are being chronically short-staffed, continually mismanaging absences, and having a company culture that encourages overtime. Regardless, the results are the same — more unplanned overtime and higher business costs.

For example, after 14 hours of overtime in a week, it becomes less expensive to hire additional staff, such as a part-time employee, rather than pay for more overtime. In addition, the cost of overtime includes both fixed and variable costs, some of which managers and business leaders may overlook. Overtime has physical, emotional, and psychological aspects to consider in addition to the impacts on compensation.(5)

Identifying patterns and trends is the first step to understanding whether overtime is supporting or hurting your operations and costs.

Did you know that…

Overtime isn’t just tough on budgeting and profits. The risk of cardiovascular disease (CVD) generally increases among employees who work more hours.6 Based on long-term study involving more than 1,900 employees, the risk of CVD:

Increases slightly among workers who clock 30-40 hours a week on averageDrops among full-time employees who work 40-45 hours a week on averageIncreases “progressively” starting at 46 hours worked each weekIs 16{6a9768acda0fe0a89780a809501f27e6450ce1f631bbc2e9f6438559b85e9cdc} greater for people who work 55 hours a week compared with those who work 45

What employers can do to limit unplanned overtime

Because unplanned and unnecessary overtime has so many causes, there are also several strategies for reducing it. Accurately aligning scheduling with your company’s needs is one critical step toward making a real difference in profits. To get there, you must be able to better estimate workloads and manage your workforce for a best-fit schedule. When you can match employee availability, skill sets, and preferences with your business demands, you can reduce unplanned overtime and maximize productivity. Other processes and management strategies to reduce unnecessary overtime include:

Reducing the time managers and supervisors need to create, update, and communicate schedules. The more efficiently this can be done, the higher the likelihood employees can respond to necessary changes in scheduling and avoid unplanned overtime.Having real-time visibility into accurate employee and scheduling data. The emphasis here is on “real time” and “accurate”. That’s the only way you can efficiently adjust schedules.Being able not only to create best-fit schedules but also have access to the data and processes needed to fill, manage, and measure the impact of those schedules. You want to be able to meet output and service goals without overspending your labor budget.

Automation delivers mission-critical benefits

The most effective way to implement any of these strategies to reduce unwanted overtime is by automating time and attendance and scheduling. Remember, overtime that’s properly projected can boost productivity, profits, and employee engagement. Unplanned overtime – well, it does the opposite in all three areas.

Eliminating unplanned and unwanted overtime requires employee schedules and a pay code system that can delineate why overtime has been used. It’s the best way your company can determine if output is truly being increased with the use of overtime.

Automation not only reduces unnecessary overtime. It also cuts the time needed to manage and control it by 20 to 85 percent. One reason is that the right automated system will give you drag-and-drop convenience for workload planning and scheduling. You’re able to automatically sort through employees based on predefined criteria including employee availability, skills, certifications, company policies, union rules, and more. The right system empowers you to more accurately align staffing and scheduling to actual demand, so you can match hours with scheduling needs. You can make sure you have the correct staffing and can prevent unnecessary overtime by having real-time insights into time recording and employee hours.

(1) John Frehse, The Overtime Lie: How Corporate Strategy Is Holding Hostage Millions of Dollars in Profit, Kronos Incorporated and Ankura Counseling (June 2017), found at 1.

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(3) Neal Bolton, Overtime: The Effect on Cost, Forester Daily News (Sept 15, 2016), found at http://foresternetwork.com/daily/waste/waste-collection/overtime-the-effect-on-cost/.

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(6) American College of Occupational and Environmental Medicine, Long Work Hours Linked to Higher Cardiovascular Disease Risk (March 8, 2016), a press release found at https://www.acoem.org/LongWk.aspx.