Alright, you’ve found skilled labor and you’ve managed to keep your employees from bolting for other firms. But now you’ve got a new problem: Your profit margins are being gobbled up by overtime—and, honestly, you’re not even really sure if your firm is managing overtime in accordance with the law.
That’s not a spot you want to be in. Overtime can make or break a firm, and managing it effectively is an absolute must for any construction business in this highly competitive business, especially if you’re operating on razor-thin margins.
Construction payroll makes up a huge percentage of your project’s total costs, so a good way to increase your profits is to cut your payroll costs.
Firms that fail to manage their overtime in the ways we’ve laid out will see construction payroll spiral out of control due to two major threats: legal liabilities from failing to follow overtime rules and regulations, and runaway spending from unnecessary overtime.
We’ll dive into the common reasons for construction overtime and how to best avoid being victimized by unnecessary overtime payments.
Ensure Your Firm Is Compliant With Overtime Regulations
The way the Fair Labor Standards Act (FLSA) describes overtime pay for nonexempt employees is simple: It is at least one and one-half times an employee’s regular rate of pay after completing 40 hours of work in a workweek.
The Department of Labor lists seven “typical problems” that get employers into trouble when it comes to overtime:
- Failure to record all hours actually worked to include time spent working before or after the shift.
- Shorting of hours by using terms such as “down time” or “rain delay.”
- Failure to compensate for meal breaks where the employee is not completely relieved of all duties to enjoy uninterrupted time for the meal.
- “Banking” of overtime hours or payment of overtime in the form of “comp time.”
- Failure to combine the hours worked for overtime purposes by an employee in more than one job classification for the same employer within the same workweek.
- Failure to segregate and pay overtime hours on a workweek basis when employees are paid on a bi-weekly or semi-monthly basis.
- Failure to pay for travel from shop to work site and back.
Construction firms that don’t abide by overtime rules face big problems. In 2016, the federal government imposed nearly $5 million in fines on several firms that allegedly wrongly declared hundreds of employees exempt from overtime.
If you aren’t sure that all these overtime rules are being met, hire an attorney who specializes in construction law and launch an internal review now to make sure you’re in compliance. This may seem like an unnecessary cost now, but the return on this investment would be massive if you’re able to find and fill some gaps in your payroll process.
But there’s something else construction managers need to be paying attention to: A major adjustment to overtime rules could be on the horizon, and it would change the meaning of “nonexempt.”
The new overtime rule would boost the salary threshold to be declared exempt from overtime pay to $913 per week, or $47,476 per year (it was $455/$23,660).
That’s no small adjustment: It affects 4.2 million workers, based on estimates from the Department of Labor. That rule was put on hold by a Texas district court in 2017, but the Department of Labor has announced plans to propose a new overtime rule later in 2018—so keep an eye on the horizon, as this will have a major effect on you if it gets enacted.
Understand—and Then Eliminate—Your Overtime Payments
When overtime kicks in, labor all of the sudden becomes 50 percent more expensive. That really takes a bite out of your bottom line, so it’s best to avoid paying overtime altogether.
You can’t fix a problem until you fully understand it. Conduct an audit of your overtime spending so you can spot opportunities to manage it better.
Your audit should answer these key questions:
- How much overtime do you pay out every year?
- Does it vary depending on what season or month you’re in?
- Does it vary depending on the type of employee?
- Are there any other consistent themes (a disproportionate amount on Tuesdays, happens more often with long-term workers etc.)?
Now that you understand where you’re spending money on overtime, you can come up with a plan to cut back. And there are a few ways you can do that.
Make Your Workforce More Flexible
You often have to spend money on overtime because only a handful of workers are capable of doing a specific task. This is when you should be looking into cross-training your employees so that they are capable of moving wherever you need them to go on a project.
It doesn’t mean they have to be experts at all things—again, take a look at your analysis: Is there one specific type of work where a disproportionate amount of overtime is going? Train other employees in that area.
Have a Cadre of Temporary Workers Ready at Hand
In today’s market, there are lots of workers out there who are happy to grab some quick temporary work. Start collecting resumes and create a cadre of temps you can draw from when the need arises. Make sure they cover a wide range of expertise, and that you have lots of them in case many of your first choices aren’t available in your short time frame.
Hire Independent Contractors
Independent contractors aren’t subject to overtime requirements, which can provide some relief. But don’t go crazy: The government is cracking down on companies that abuse this rule and classify workers as independent contractors when for all intents and purposes, they’re employees.
Also, independent contractors can end up more expensive. Make sure you do the math beforehand and determine that it would be cheaper than paying your employees overtime.
It finds that by providing some masonry training to its plumbers and welders, who are often largely idle or doing unimportant tasks for several hours per week, that it can cut overtime by 80 percent.
Next Steps in Taking Control of Your Overtime Costs
Labor makes up a huge chunk of your construction costs—perhaps the bulk of it. Paying 50 percent more for that labor is a losing proposition for construction firms surviving on 2-3 percent profit margins. It’s also a legal liability if you’re not doing it right. So you’ve got to tackle this problem now.
Take these action steps to begin to manage your overtime more effectively:
- Conduct a thorough internal review of overtime practices with a lawyer to ensure you are meeting all rules and regulations.
- Conduct an audit with your accountant to understand how much you are paying for overtime and where you can cut back on overtime.
- Find construction management software that can help you better track overtime and therefore manage it more effectively.