The Fair Labor Standards Act requires employers to pay nonexempt status employees an overtime rate at least equal to 1.5 times the normal hourly wage for each hour worked beyond the 40-hour workweek period. ACME manufacturing has just signed a lucrative contract to produce the casings for flashlights. The contract spans five years. During this time, ACME must increase its total manufacturing output by 10 percent. To meet this added demand, the company’s compensation and HR leadership will have to decide whether to require current manufacturing employees work additional hours per week, hire additional workers, or both. Making this decision will require an analysis of compensation costs and other HR-related expenses (for example, training).
Overtime Pay Scenario: Let’s assume that ACME employees 1,000 manufacturing employees and each of these employees earns $20 per hour. Because manufacturing output will increase by 10 percent, each employee would have to work an additional 4 hours per week (40 hours per week × 10%). For each of these additional 4 hours, employees would earn $30 per hour ($20 per hour × 1.5 hourly overtime pay premium). Hiring Additional Workers Scenario: To meet this additional demand (10% output), ACME would
have to increase their workforce by 10 percent, or 100 employees (1,000 person workforce × 10%). Besides hourly pay, there are costs associated with hiring new employees. These include employee benefits ($10,000 annually per new employee), recruitment ($5,000 on a one-time basis per new employee), training ($3,000 on a one-time basis per employee), and termination ($12,000) upon the end of the con-tract period.
Is it more cost effective to have current manufacturing employees work on an overtime basis during the life of the contract or to hire new employees?
Would it be more cost effective to hire 50 new employees as well as having half of current manufacturing employees work overtime?