Incidental overtime typically lasts less than an hour. It most often happens when an employee clocks in early or late, or misses lunch. It may be costing your organization millions of dollars. Eight strategies help you identify and reduce its cost.
How big a cost is incidental overtime?
Healthcare labor analytics groups find that finance departments budget overtime at 2% to 4% of total payroll . However, actual cross-departmental averages are closer to 7% to 12% of payroll.
That represents total overtime paid – both scheduled and incidental. How much of that is incidental overtime? The Workforce Management team at symplr found that incidental overtime typically accounts for 5-10% of overtime costs.
Using the low end percentages, we can see the actual costs to an organization. An organization with a payroll of $300 million would have total overtime cost of $21 million. Incidental overtime costs would surpass $1 million. And this is using the lowest estimates!
As already defined, incidental overtime is usually the result of clocking in/out violations or missed lunch. Very little productive work gets done. When incidental overtime is reduced or eliminated, the savings fall directly to the bottom line.
5 Strategies to understand and reduce incidental overtime costs
1. Perform routine audits of payroll and T&A records.
- Track percentage of overtime hours to regular hours. Look for cost centers that exceed the norm.
- Identify departments or managers that have patterns of high early or late clock ins/outs, missing lunch. This suggests that management may be very lax in enforcing policies .
- Identify individual employees that have abnormal clock in/out patterns. Routinely clocking in/out in a manner that takes advantage of rounding policies can be addressed with the employee as abuse.
- Use T&A records to zero in on individual employees or specific occurrences.
2. Let managers know you are watching.
No manager is allowing incidental overtime to occur on purpose. Managers are very busy and may not be checking records on a daily basis. Before taking managers to the woodshed, inform them that incidental overtime will be monitored. Share strategies on how it can be reduced or eliminated.
3. Provide managers with the resources to proactively prevent incidental overtime.
Managers may need additional training in pay policies, identifying abuse, and real-time T&A reports. Most payroll/time and attendance systems can allow managers real-time access. Managers need information prior to the end of the workweek in order to correct the overage during the pay period.
4. When incidental overtime occurs, reduce the employee’s work schedule later in the workweek.
Because of rounding policies, an employee can significantly increase paid time beyond what is scheduled. Most organizations use the 7-minute rounding rule. This practice rounds to the nearest 15 minute increment. Clocking in 7 minutes early is rounded to the scheduled start time. Clocking in 8 minutes early adds 15 minutes to the work time.
If this is done at the start and end of a shift, the employee can add 30 minutes daily to paid work time. For employees with a 5-day workweek, this adds 2.5 hours weekly.
Employees who clock in early or clock out late can be asked to leave early later in the week to maintain scheduled paid work time. This applies whether the overtime was authorized or not.
5. Consider changing payroll rounding practice.
If the payroll system can handle it, consider changing the rounding practice. Some organizations round to the nearest tenth. Abuse still needs to be monitored, but it reduces the cost to 3-minute increments rather than 15-minute increments.
Local laws and applicable labor agreements need to be consulted.
6. Reduce full-time employees from 40 to 37.5 hours per week.
Healthcare organizations frequently use a 12-hour workday for patient care departments and schedule other departments with an 8-hour workday. A full-time equivalent is 36-40 hours/week.
Most organizations also provide a 30-minute unpaid lunch period. This means that clinical staff are at work for 12.5 hours daily, and other employees are on the premises for 8.5 hours.
This extra half hour provides overlap for patient care areas that must transition care from one shift to another. However, it is not required for areas that do not have to “pass” care on to another shift.
It makes no sense to maintain this extra 30 minutes for most staff. Reduce the daily shift to 7.5 paid hours (the employee will still be on the premises for 8 hours.) This practice reduces the workweek to 37.5 hours which provides a 2.5 hour margin before overtime pay applies.
We did this at one organization with spectacular results. Impacted employees were given a pay increase to compensate for reduced hours. Pay stayed the same, the organization had huge savings in overtime. And guess what? There was no measurable decrease in productivity!
Of course, it could be implemented without offsetting the wage loss. It can be argued that the employee is working 30 minutes less each day so reduced pay should follow. Either approach can be justified depending upon potential reaction of impacted employees.
One organization consulted with employees who would be impacted prior to implementation. Since there would be no increase, they solicited employee feedback on the proposal. The employees were mostly enthusiastic about working less hours while still maintaining full time benefits.
7. Make managers and employees accountable for overtime management.
Meeting overtime targets should be a part of management performance appraisals. Compliance should be a part of the employee’s appraisal. Reducing overtime should be a responsibility of everyone. This can be included under the broader umbrella of maintaining scheduled work shifts.
8. When overtime costs are higher than industry norms use reward and recognition programs to change behavior.
Many organizations have overtime costs way above 7%. In fact, many organizations have overtime costs ranging from 12-20% of payroll. Reducing this requires a serious organization effort. Benchmark goals may not be reached in a single effort.
- Use of interdepartmental teams can be very helpful for organizations with high overtime costs.
- Set interim goals. If the organization is at 14%, don’t try to get to 3% in one step. Aim for 11%, then when that is achieved, go for 8%, etc.
- Use recognition and reward programs to recognize and reinforce positive changes and behaviors. Make heroes of managers and department with very low usage. Here’s one simple low-cost recognition tactic that you are probably not using.
- Reward departments that show the biggest improvement. This applies not only to incidental overtime, but reducing scheduled overtime as well. Consider team incentive plans.
Final thoughts
We used very conservative numbers when describing the cost of incidental overtime to the organization. In fact, the costs provided at the beginning of this post were the most conservative that we could find. There is other data that suggest incidental overtime may cost the organization $1-2 million per 1000 employees. That seems high but could be realistic for some organizations.
Other sources suggest that the larger the organization, the less oversight and daily management.
We will leave it to you to determine the cost to your organization. One thing is certain –incidental overtime can be eliminated without any loss of productive work.
