10 Strategies for Managing Overtime to Improve Manufacturing Margins

Why Overtime Management Matters in Manufacturing

These days, it’s tough to find enough skilled workers to fill manufacturing jobs, with about 400,000 U.S. roles sitting vacant. To fulfill production needs, you’re probably closing the gap by asking existing employees to work overtime shifts. 

Each week, frontline manufacturing employees work 3.6 hours of overtime on average, but that doesn’t paint the full picture. In the aerospace industry, for instance, 34% of employees say they typically work at least 5 hours of overtime weekly, with 3 percent of those averaging up to 16 to 20 hours of overtime.

Encouraging overtime can help your facility stay on schedule, but it carries significant costs – impacting both your budget and your employees’ well-being. Employers are obligated to pay 1.5x each employee’s hourly rate for overtime labor, and team members who work overtime are more likely to suffer injuries and burnout.

Getting a handle on effective overtime management is crucial for both controlling costs and improving your workers’ well-being, which will result in lower absenteeism and higher retention rates.

In this guide, we’ll help you build a structured approach to overtime management that helps minimize overtime pay without impacting business productivity.

What Is Employee Overtime?

Employee overtime refers to any time worked in excess of a standard workweek, which is typically set at 40 hours per week under federal guidelines. Only non-exempt workers, which includes shift-based frontline workers in non-managerial positions, are eligible for overtime pay. Their overtime rate must be a minimum of 1.5x their standard hourly rate, as mandated by the U.S. Department of Labor under the Fair Labor Standards Act (FLSA).

For instance, if a forklift operator is paid $20 an hour as a standard wage, and works 7 hours of overtime for that week, their total payroll wage would amount to ($20 x 40) + ($30 x 7), or $1,010.

Some states have even more stringent requirements. For example, in California, overtime rates apply any time an employee works more than eight hours in a single shift, and workers must be paid double for hours beyond 12 in a day. Before asking your employees to work overtime, be sure to check state-specific guidance for your area, and consult with employment attorneys to ensure that your policies are compliant.

The Risks of Non-Compliance in Overtime?

For starters, you’ll need to cover back pay for employees if you failed to pay their overtime rate for qualified hours – plus an equivalent amount in liquidated damages. You may also be subject to civil penalties of up to $1,000 per violation (or $10,000 for situations involving minors), and much steeper fines and even criminal charges for repeat offenses. You could also be subject to lawsuits from employees for failure to pay overtime, or even class-action suits, which could result in much higher settlement claims.

11 Strategies for Effective Overtime Management

1. Monitor Current Overtime Rates

   Are you paying too much in overtime labor? Before you can address the situation, it’s important to use labor tracking tools to help you get an accurate read on your organization’s current overtime utilization. This will help you understand your company’s benchmarks, and help you set goals for minimizing overtime without negatively impacting productivity.
   
   Start by setting up an automated attendance tracking system. By pairing TeamSense, which tracks real-time attendance data, with a time-clock system and HRIS, you’ll be able to tap into granular data insights that help you make sense of trends in employee overtime, and how that correlates to metrics including injuries, absences, and output.
   
   Pay attention to key metrics, including:
   -Total overtime hours per week/month
   -Overtime as % of total labor hours
   -Overtime by department/shift/manager
   
   By gathering and analyzing data across all of your shift-based teams’ operations, you’ll be able to identify which departments are relying heavily on overtime, and can better tie overtime work as a leading contributor to outcomes such as reduced productivity, absenteeism, and turnover rates.

2. Improve Workforce Planning

   Managing overtime effectively starts with being proactive, not reactive. Take a bird’s-eye look at your workforce data to understand seasonal trends and labor shortages. Work with your company’s HR team to identify current and upcoming skills gaps, so that they can recruit a pool of on-demand staff with the skills and certifications needed for your company.
   
   When seasonal spikes occur, you should make sure to expand your recruiting efforts in advance of peaks in demand, so that your team will have the human resources it needs to handle production needs without relying heavily on overtime labor.

3. Address Workflow Inefficiencies

   Reviewing your workforce data should also help you get clear indications around what’s not currently working in your process – whether the issues are company-wide, or focused around one or more specific teams or facilities.
   
   By determining which locations or teams are using the most overtime labor, you’ll be able to identify problems around management, production processes, and equipment downtime. When you spot issues, conduct a detailed audit of that team or facility’s workflows to understand the bottlenecks, and set up a process improvement plan that can help them improve productivity without relying on overtime labor.

4. Incentivize Regular Attendance

   By using attendance management tools like TeamSense, you can help your employees stay accountable for showing up, using a points-based attendance system that helps them track how often they’ve called off. Employees will collect points based on being tardy or absent without prior authorization, resulting in disciplinary procedures (including the risk of termination) as infractions build up. Giving workers clear visibility around attendance and how it relates to job performance can help you reduce absenteeism by up to 40%. 

5. Use notifications to keep employees on track

   Tech tools can do more than simply track and analyze attendance data – they can also help you manage attendance, ensuring both compliance with FMLA and your workplace’s overtime policy. You can set up automated alerts to ensure that employees are taking breaks on schedule to reduce risk of fatigue, and to let them know when they should sign off before overtime pay rates kick in.
   
   You can also reduce the risk of unplanned absenteeism by sending out pre-shift alerts, ensuring that your employees are prepared for their shifts and that they’ll notify you with adequate time to find a replacement if they need to call off.

6. Optimize Scheduling

   Using automated scheduling tools can help you build schedules that fit your employee’s needs and preferences, reducing the risk of unplanned absenteeism. Consider a tool that lets your team members swap out shifts with one another, so that you can minimize the amount of overtime work you assign.
   
   When an unplanned absence occurs, it’s also important to optimize your schedule as quickly as possible to avoid downtime and minimize overtime. In this case, you can use TeamSense’s notifications to alert eligible team members about the available shift via SMS message, prioritizing those who are scheduled for less than 40 hours in a given week.

7. Cross-Train and Upskill Workers

   Within manufacturing, many pieces of machinery require specialized training and credentials to operate – so if a key worker doesn’t show up, you may be forced to pay overtime to another worker with that specialized credential.
   
   By building a program to upskill and cross-train your frontline workers, you’ll be able to ensure that more of your team members can swap out for one another’s roles in a pinch, helping you minimize the need to pay overtime for access to in-demand skills.

8. Stagger Shifts and Breaks

   On average, 6% of hourly workers arrive to work late. While that number may seem low, it can wreak havoc with your production schedule if a crucial worker doesn’t show up on time. To reduce the likelihood of downtime spent waiting on key employees, consider staggered start times and breaks to distribute the workload more evenly over your production schedule, and minimize the risk of overtime resulting from unplanned downtime.

9. Set Clear Approval Guidelines for “Good” Overtime vs. “Bad” Overtime

   Some workers are eager for overtime hours to increase their weekly paychecks – and it can make sense to approve it, as long as certain conditions are met. For instance, you may consider automatically approving overtime up to five hours per week (which will have minimal impact on productivity), while only approving overtime above that limit in specialized circumstances, such as during peak production times. Supervisors should never mandate overtime for their employees; it should be voluntary and structured, with clear limits in place, for those who choose to work overtime hours.

10. Balance Overtime Use With Temp Staffing

    When possible, limit overtime and protect your employees’ productivity by turning to temporary labor, particularly for jobs that aren’t highly skilled. By using temp workers to fill gaps during busy times, you’ll be able to keep payroll costs lower and ensure that your full-time employees aren’t getting burned out on the job. 

11. Strategically Use Overtime for Production Periods

    In some cases, overtime work makes sense. Relying on overtime labor can be a good fit for short-term projects related to urgent orders or specialized projects. By doing so, you can make the most of your skilled employees’ expertise without needing to train or recruit new workers for limited-duration projects.

Building Systems for Effective Overtime Management

Overtime can be a valuable short-term tool to maximize the output of skilled workers during high-volume production cycles, but it’s risky to rely on as a long-term staffing strategy.

By taking the time to understand how your organization is currently using overtime, you can identify process gaps that lead to negative outcomes such as increased costs, absenteeism, injuries, and turnover. From there, you’ll be prepared to set up a structured set of best practices for allowing overtime in specialized circumstances, without relying on it as a go-to measure for meeting production output goals.

With access to technology platforms like TeamSense and other HR tools, it will be easy for your organization to get a unified view of how and when your company is using overtime, making it easier to optimize schedules on a real-time basis. Beyond controlling costs for your organization, limiting overtime can help you set up your frontline workers for success by enhancing their productivity and well-being on the job.

Take control of overtime, and you’ll see healthier, happier employees; enhanced productivity; and an improved bottom line for your company.

Overtime FAQs

Why is overtime work common in manufacturing?

Overtime scheduling is common in many industries with shift-based workers, including construction, healthcare, logistics, and of course, manufacturing. In the manufacturing industry, we’ve already alluded to the labor shortage that’s fueling high overtime rates. But it’s not the only factor involved. 

Here are the most common factors for overtime in manufacturing:

1. Staffing shortages and unplanned absences
   The manufacturing industry has an unplanned absence rate of 2.8%, which is typically due to illness or injury. When supervisors don’t have time to make schedule changes in advance, they’re likely to ask existing workers to extend their time on the clock.
2. Seasonal or peak demand surges
   Manufacturing production cycles can be cyclical, which means you may not have enough labor to support your needs during high-demand periods without relying on overtime.
3. Equipment downtime or production bottlenecks
   Unplanned downtime is a productivity killer, forcing your team members to wait around until the issue is resolved – and then work overtime hours to complete their tasks once your production line is back in action.
4. Scheduling inefficiencies or poor shift coverage
   If you’re not precise in scheduling employees with the exact mix of skills and certifications you need for specific production lines, you may end up asking your more-skilled workers to stay for extra hours to cover production needs that others can’t perform.
5. Sudden large orders or rush jobs
   When production requirements increase without notice, your facility may need to resort to overtime pay to ensure you have adequate staff on hand to handle output needs.

What are the hidden risks and costs of overtime?

Overtime is costly – both to your company and to your workforce. While some amount of overtime may be unavoidable, using it as a primary solution to address organizational inefficiencies will lead to problems, including higher operating expenses, more worker injuries and burnout, and increased quality control issues.

1. Higher Operational Costs

Under FLMA, employers are obligated to pay at least 1.5x an employee’s regular hourly wage. If you average five hours of overtime per week for a team of 40 frontline workers with an average wage of $25 per hour, you’ll be paying $7,500 extra in payroll each week – or $390,000 on an annual basis.

On top of that higher price tag, workers’ productivity tends to go down as hours increase. One study found that employee productivity tanks after 60 hours per week, with a 25% drop in output. That means as an employer, you’re paying more for reduced output per hour.

2. Worker Health & Safety Risks

The damage isn’t just to your bottom line, though: Employees suffer when they work an excessive amount of overtime. In fact, an NIH study found that workers who complete more than 12 hours in a single shift are 37% more likely to be injured on the job, and employees who work more than 60 hours per week (regardless of shift length) are 23% more likely to be injured. Because these workers often aren’t getting enough sleep or rest time, they may be less alert, leading them to make dangerous mistakes on the job.

3. Quality Control Issues

When employees are overtired and stressed, the work quality is likely to suffer, too. Increased overtime can lead to mistakes in production, which can cost your company more through increased rework or scrap costs. In fact, one 7-year study found that manufacturing plants that rely on heavy overtime usage have an average of 8 additional recalls, translating into a $167 million cost.

4. High Turnover and Absenteeism

Employees who are regularly required to work overtime are also more likely to feel stressed and burned out, which can increase their risk of quitting. One study found that overtime, combined with workload and job stress, explained over 77% of employees’ intentions to leave their jobs. Workplaces with high rates of overtime also have elevated rates of absenteeism, with 54% of such organizations reporting high absenteeism, compared with 23% in workplaces with normal overtime levels.