Before the break up of Ma Bell in 1986, long distance phone calls used to cost a fortune.  Then competition like Sprint and MCI drove down the cost of long distance, and by the 1990s long distance calls were less expensive than local calls.  But that is still news to my grandmother, who to this day will not talk on the phone to another area code for more than 59 seconds.

Our former plant manager was similarly phobic towards overtime pay, prohibiting it under any circumstances. And I never questioned him--after all, with our labor costs so high to begin with, how could we possibly make any money paying 50% more for the same work?  A year after he retired, we faced a tremendous temporary surge in business--providing both 2008 presidential candidates with hats and bags.  We had to make a quick decision--do we hire 20 more sewing operators, or give 80 of our operators the chance to (voluntarily) work an extra 10 hours a week at time and a half?  I don't know what drove me to "do the math"--on the surface it seemed that hiring the cheaper new operators would be a no brainer--but the answer actually astonished me.

The first thing I noticed was that our regular time was actually costing us more than time and a half.  Besides the 11% federal employer portion of taxes, we had 3% for workers comp, 3% on our pension contribution, and 1% on city taxes--an 18% vig to the system.  Then there was 25 days of unworked pay: 10 holidays, 10 vacation days, and 5 personal and sick days, all subject to the 18% vig. When amortized over the other 236 weekdays in the year it meant 12.5% of every dollar of regular pay went to fund unworked pay. Finally, our health insurance costs worked out to $2.22 per regular hour worked, or 22% of a $10.00 wage. We also gave production bonuses averaging $.75 per hour, or 7.5%.

So regular pay was costing us 60% more than the gross wage. How does that compare to overtime?  The health insurance, unworked pay, and pension were all paid for by regular time--they don't increase with overtime. We don't give production bonuses on overtime hours, and in our state workers comp is not charged to overtime hours. That just leaves the 12% in payroll taxes, plus the "and a half" premium (also subject to 12%)--a total of 68%.  

So all things being equal, overtime was costing just 5% more (168%/160%) than regular time per hour for the same employee.  But all things are not equal--because when overtime is necessary, the alternative is hiring a new employee, training them, replacing them, training their replacement, then letting them go when demand goes back down before they reach their full potential. They may be a couple of dollars cheaper, but for the first few months they add so much less value and require so much more high labor cost supervision.

Another argument against overtime is that it fatigues the workers. What we discovered was that a number of our workers had second jobs that they gave up because they were making more in ten hours of overtime than they were in twenty hours of their part time second jobs.  One of the great benefits of voluntary overtime pay is that so much more of the payroll costs ends up the employees pockets. If an employee is making a just over a living wage, overtime can multiply their discretionary income many times over.

In this recession I regularly read about companies who cut back hours to save labor costs. In the scenario above, a $10 worker costs the company around $16 per hour whether they are working regular time or undertime.  However, if their hours are cut back to 32 hours per week, that means that health insurance and unworked pay are amortized over 20% fewer hours--so labor costs per hour increase significantly.  Employees may be sacrificing to share the pain, but both companies and employees always lose out when workers don't work at least 40 hours.

So the bottom line--don't fear overtime--it doesn't cost a company any more than regular time, and it may cost a lot less.