When organizations struggle to make ends meet, overtime often becomes a target in their budget reduction plans. Although reducing overtime may be financially prudent for most departments, it is a poor choice for those that operate around-the-clock. Here's why.

The simplest and most common way to provide 24/7 coverage is with four crews. If the crews work 40 hours a week, that provides 160 hours of coverage (4 crews * 40 hours = 160 hours). The problem is that there are 168 hours in a week (24 hours * 7 days = 168 hours).

The easiest way to close the 8-hour gap is to have the four crews work a small amount of overtime (an average of two hours per employee every week). With 8-hour shift schedules, that requires three hours extra pay for each employee, or a 7.5 percent increase.  With 12-hour shift schedules, that requires four hours of additional pay for each employee, or a 10 percent increase.

If an organization is prohibited from using overtime, it must choose one of the following approaches to avoid gaps in coverage:

1. Use part-time employees. Some smaller organizations can do this, though it can be a challenge to find and retain good part-time employees. With larger groups, it can be difficult to fit part-time employees into the schedule without having one shift staffed solely with part-timers. This approach will increase costs by 5 percent. Although slightly less expensive than using overtime, it has limited applicability.

2. Use more than four crews. A schedule that uses more than four crews requires a larger headcount. If an organization does this, they usually allocate some of the extra work hours to training, relief, maintenance or special projects. Even if you ignore the cost of benefits for the additional employees (usually anywhere from 40 percent to 50 percent of the wages), this approach will increase costs by at least 25 percent.

3. Use a crewless schedule. Instead of scheduling groups of personnel (i.e. crews), you could develop a schedule for each individual employee. This approach also will require more employees than a typical four-crew schedule. The number depends on: (a) the shift length, (b) whether the shifts are rotating or fixed, and (c) the number of job categories/positions involved. This can increase costs anywhere from 7.7 percent to 50 percent if you ignore the cost of benefits. In most cases, this approach will cost more than using a four-crew schedule with built-in overtime.

Although overtime is often perceived as something to be avoided (because it requires a time-and-a-half pay premium), it is not the most expensive approach for providing 24/7 coverage. Using part-time employees to supplement four full-time crews is the least expensive solution, but this is only feasible in smaller groups. So, before banning overtime, it is important to recognize that the policy will force groups that operate around-the-clock to adopt schedules that are actually more expensive.

When organizations view overtime as an expense rather than a strategic tool, they often make three major mistakes:

• They staff for peak demand. In order to have enough resources on hand to respond to short-term fluctuations in demand, they over-staff instead of using overtime. Usually this is the most expensive approach.
  
  
• They sacrifice customer service. Without overtime, they are unable to respond to fluctuations in demand. In short, they sacrifice customer service to avoid overtime.
  
  
• They build up an inventory of excess product to have a cushion for demand variations. The cost of this inventory must be passed on to customers.
  
  

Here are three more articles on overtime.

Reasons for using overtime. Four valid reasons for using overtime are: (1) 24/7 coverage, (2) workload fluctuations, (3) staff variations, and (4) labor market considerations.

Overtime problems. High overtime, especially when it continues for an extended time period, has several potential drawbacks: (1) an overtime-dependent workforce, (2) safety and quality issues, (3) absenteeism, and (4) lower productivity.

Correcting overtime problems. To avoid overtime problems, you should regularly monitor overtime and absences. You also should understand the workload variations and take steps to improve the accuracy of your demand forecasts. Periodically, you should review your organization's overtime distribution policies to make sure they are working properly.