Skip to main content

NEW YORK (TheStreet) -- With rising costs for small-business essentials such as health care and rent, it's not always easy to successfully budget a year or even six months in advance. When budgeting for employee salaries, the cost of overtime can also be difficult to pin down. Even if you plan to cut your employees off with a strict 40-hour work week, some overtime hours should be factored into your budget. Experts weigh in on the top situations where overtime is a must:

When you can avoid hiring another full-time staffer.

Most companies can estimate an overtime budget of 10% to 15% of their total annual budget, says John Malloy, president of executive search firm Sanford Rose Associates in Santee, S.C. Although that may sound like a lot, it's a drop in the bucket compared with the cost of hiring and training.

"Think about what it will cost to hire, train and retain a new person vs. what you'll spend paying your employees for a few extra hours of their time," he says, adding that it just makes more sense to give overtime to the employees you've already trained and provided benefits for.

"Overtime isn't a bad thing," he says. "At many manufacturing companies, employees are accustomed to getting 15 or 20 hours of overtime each week. They may have a fairly modest base wage, but when they get that overtime it's a boost for morale and does a lot for employee retention."

Employees who collect overtime regularly will be less tempted to migrate to another company -- they grow accustomed to their weekly bonus, and they realize it's a good thing.

"When an employee gets locked into expecting a check of that size, they're loyal," he says. "When you think that you can get that loyalty for far less than what you'd pay to hire another employee and give that person benefits and training, it's a no-brainer."

Also see: Small Business Burnout: How to Keep Employees Happy and Engaged>>

When business is busy, employees get sick or there are other "unknowns."

There will be times of the year you have to pull the trigger and draw from your overtime budget -- even if you're saving it for a rainy day, Malloy says.

"It is going to happen -- if you are running a two- or three-person business there will be unforeseen circumstances. Even if you are running a 20- or 30-person business you will encounter those unknowns," Malloy says.

Those "unknowns" will vary from industry to industry. Companies in retail may have a big holiday rush, while manufacturing companies may be busier in the summer. Restaurants will have to budget for busier times of day, while other companies may need to pay overtime to half their staff if the other half falls ill.

"The point is that anyone who doesn't budget for OT is kidding themselves," Malloy says.

Many businesses with part-time employees can budget throughout the year so when a slower season or month arises they can adjust the number of hours they need worked, says Steve Freeman, director of human resources consulting for CoAdvantage.

"If you know you're going to rack up longer hours during the holidays or over the summer, it just needs to be built into the budget. Understand what kind of staff you need. Maybe it's only one-third of the staff that need to work over holidays," he says.

If you really want a ballpark figure for how much you'll need for OT, look at previous years' budgets, Freeman says. Keep in mind that the number may be too high or low depending on how your company has run and what your employees have grown accustomed to.

Also see: Early Bird vs. Night Owl: What's Really Better for Productivity?>>

"Overtime can become 'built in' to an employee's standard of living," Freeman says. "If you see that you've been paying someone an extra 10 hours of OT each week, trying to get those people to cut back to a normal 40-hour workweek is next to impossible. With that said, if you haven't been paying enough OT, you can get sued, so you have to find your middle ground."

Whenever your employee works even one hour extra.

Legally, this is where it gets tricky, says Susan Trench, a partner and labor and employment attorney at Arnstein & Lehr.

Unfortunately, a lot of small-business owners don't understand that they are required to pay employees overtime for every hour worked over 40 hours each week, Trench says.

"Some businesses may say, 'Oh we were good to our employees, we gave them a bonus at the end of the year and we bought them a birthday present,' and they think that covers them for having made the employee work 45 or 50 hours each week. It doesn't," she says. "They are liable for those overtime hours."

Thankfully, this problem can be solved by having a reliable person on staff who keeps excellent records. If your employee says you made them work 60 hours each week without additional pay, the burden will be on you to prove otherwise, which means time sheets, time cards and other records are all of paramount importance.

"Make sure you budget someone who keeps track of time for your employees, whether you have two employees or 20," she says. "You can't substitute giving someone a turkey at Thanksgiving for the requirement that you have to pay overtime."