Fears regarding the fiscal cliff and its possible impact on our economy are causing many small businesses to rethink their hiring decisions for 2013.  Many will try to do “more with less”.  However, when it comes to your workforce, doing “more with less” will cost you more money after everything is said and done.

This seems counter-intuitive since (well) many workers accept any opportunity for overtime, but in the long-run, running continuously understaffed and using overtime as a permanent solution can hurt your business.  Here are some examples:


Overtime is not simply a time and a half calculation; it can affect the cost of all hours worked, due to lowered productivity.  Research has shown that employing overtime during the first few weeks will cause total productivity to increase.  However, after approximately 8 weeks, productivity will drop to a point that all previous gains will have been erased.

Attention to detail suffers; employees make mistakes; deadlines are missed, customers become increasingly dissatisfied.  The vicious cycle will spiral out of control.

Employee stress

Employees whose job responsibilities have grown exponentially through the use of overtime (or even through the absorption of another employee’s job responsibilities) report higher levels of stress.  A study by Northwestern National Life (now ReliaStar Financial Corporation) found that 7 out of 10 employees who experience job stress said they frequently suffered health ailments.  In the U.S., job stress is estimated to cost industry $300 billion per year in absenteeism, increased health insurance premiums, diminished productivity, compensation claims, and direct medical costs.  Healthcare expenditures are nearly 50% greater for workers who report high levels of stress.

Turnover costs

Turnover also increases when stress levels rise in the workplace.  After a point, any additional income that can be earned through the use of overtime becomes less valued.  Workers begin to seek opportunities elsewhere.  The cost of replacing a worker can be high. While no definitive number exists, the Society for Human Resource Management (SHRM) estimates that it costs $3,000 to replace one $8/hour employee.  Other sources have estimated the costs to be:

  • 30-50% of the annual salary of entry-level employees
  • 150% of middle level employees
  • up to 400% for specialized, high level employees

 Missed opportunities for growth        

When a company begins to have productivity issues that impact its ability to meet deadlines and manage existing workloads, it will not be able to successfully accept new business opportunities.  In severe circumstances of widespread understaffing, a company puts itself as a severe disadvantage when compared with competitors that aren’t understaffed.

As you can see, running a lean operation doesn’t always save you money if you’re understaffed and your employees are overworked. A well-staffed organization allows your employees to do their best work and gives you a better chance of remaining competitive.  Overtime can work as an occasional necessity, but it does not make economic sense to use it continuously.  If you are still leery of bringing on new staff in the new year, why not consider temporary workers to help fill coverage gaps and help with fluctuating demand?  Temporary workers are a great solution to help with understaffing while you search for a replacement, and (who knows) the temporary worker that walks through the door, could be your next full-time employee.

By David Allen, Snelling.com

NOTE:  A full-color, downloadable PDF is available.