Overtime definition

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What is Overtime?

Overtime is hours worked in excess of normal working hours. The concept is typically used in regard to the overtime premium associated with these excess working hours, which is usually set at 1.5x the normal hourly pay rate. Normal working hours are defined based on federal, state, or local rules but are typically eight hours per day for a five-day work week, or as 40 hours worked over the course of a week. Working hours may also be defined within a union contract. The basic provisions of overtime pay at the federal level are stated in the Fair Labor Standards Act.

Advantages of Overtime

The higher pay rate associated with overtime encourages employees to work additional hours. It also allows a business to keep staffing levels relatively low, which is an advantage when sales levels vary significantly over time. The employer can simply maintain a small core group of experienced employees to service its minimum sales level, and then ramp up overtime when sales levels increase. As long as the amount of overtime is not oppressive, employees may appreciate earning the extra money.

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Disadvantages of Overtime

There are several disadvantages associated with having employees work overtime, which are as follows:

  • Labor costs are too high. Overtime does not work so well when a business experiences relatively steady sales levels. When this is the case, it makes more sense to increase the number of employees to service sales at a no-overtime level, since the overall cost to the business is lower than if it continually pays overtime to a smaller group of employees.

  • Employees are less efficient. Employees can wear down under the impact of large amounts of overtime over an extended period of time (despite the extra money they earn). This tends to make them less efficient, so that a business using overtime may find that its employees incrementally produce fewer units while costing the firm much more to produce those units.