There seems to be a widespread interest in reducing or eliminating overtime in shiftwork operations. I believe the two most common reasons for this are:

• Top management sees overtime as an unnecessary expense.
  • They're unaware of the unique needs of groups that work 24/7
  • They haven't considered the total costs
  • They fear that constituents / shareholders will see any overtime as poor fiscal management
     
• Overtime costs are out-of-control, and management is simply trying to stay within the budget.
  • They feel compelled to do whatever they can to get rid of the overtime, assuming that this will help
  • They haven't examined or addressed the reasons for the overtime

Before jumping to conclusions about overtime, it's important to understand its two primary sources:

• Overtime in the schedule itself
• Overtime outside the schedule (to cover resource or workload variations)

Let's take a closer look at each of these sources of overtime.


Overtime in the Schedule
Some organizations have overtime in their schedules because they are under-staffed. They may have had a hiring freeze, been forced to downsize, or are in an industry where the employees expect to work a lot more than 40 hours a week. Some industries, for example, use 3-crew schedules to cover 24/7. This requires employees to work an average of 56 hours a week. When employees are averaging 48 or more hours per week over an extended period of time, you can expect more accidents, errors, increased absenteeism, and higher employee turnover. You can read more about these sorts of problems here.

 

When 24/7 operations are staffed properly, the employees will average 2 hours of overtime a week. That's because the schedule uses 4 crews. It doesn't matter whether you use 8-hour shifts or 12-hour shifts. Here's why. There are 168 hours in a week (24 hours/day * 7 days/week = 168 hours/week). When you divide this by 4 crews, you get 42 hours/week. There are several ways to reduce this to 40 hours a week, but they are usually more expensive than simply building the overtime into the schedule.

 

Here's an example. A small security unit needs two guards on duty around-the-clock. If they work an average of 42 hours a week, this would require 8 guards. If they work 40 hours a week, this would require 9 guards on a schedule with no crews, 10 guards on a schedule with 5 crews, or 12 guards with 6 crews. Here are the weekly hours of pay for the four approaches:

 

8 guards with OT:     8 employees * 40 hours/week  +  8 employees * 2 hours OT/week * 1.5 OT premium = 344 hours/week (rotating 8-hour shifts or any kind of 12-hour shifts)

9 guards:                  9 employees * 40 hours/week = 360 hours/week (rotating 8-hour or 12-hour shifts)

10 guards:               10 employees * 40 hours/week = 400 hours/week (rotating 8-hour shifts or any kind of 12-hour shifts)

12 guards:               12 employees * 40 hours/week = 480 hours/week (fixed 8-hour shifts)

 

As you can see, the schedule using 8 officers would incur the fewest hours of pay. What happens if we also consider the cost of employee benefits (holidays, vacation, insurance, etc.) which often amount to 40-50% of wages. If we assume benefits cost 50% of wages, here are the weekly hours of pay for the four approaches:

 

8 guards with OT:     8 employees * 40 hours/week * 1.5 benefit costs  +  8 employees * 2 hrs OT/week * 1.5 OT premium = 504 hours/week (rotating 8-hour shifts or any kind of 12-hour shifts)

9 guards:                  9 employees * 40 hours/week * 1.5 benefit costs = 540 hours/week (rotating 8-hour or 12-hour shifts)

10 guards:               10 employees * 40 hours/week * 1.5 benefit costs = 600 hours/week (rotating 8-hour shifts or any kind of 12-hour shifts)

12 guards:               12 employees * 40 hours/week * 1.5 benefit costs = 720 hours/week (fixed 8-hour shifts)

 

By leaving overtime in the schedule, the security unit only needs to employ 8 guards. Compared to the approaches that avoid overtime in the schedule, they will save 36 to 216 hours of pay each week. Assuming an average wage rate of $15 per hour, this amounts to $540 to $3,240 a week or $28K to $168K a year in savings.

Overtime Outside the Schedule
There are three valid reasons for using overtime outside the schedule. We consider two of them: (1) temporary fluctuations in the available resources (due to absences or vacancies) or (2) temporary fluctuations in the workload. You can read more about these reasons here. We recommend that you compare the cost of using overtime versus the cost of increasing the headcount to handle the resource or workload variations. We will ignore the possibility of living with reduced coverage or not satisfying the increased demand since this is usually unacceptable.

 

Here's an example. A maintenance group needs a minimum of 2-person coverage on a 24/7 basis. They have a 50% benefit loading cost, and a 7% absence rate.

 

8 Employees with 2 Hours OT a Week (rotating 8-hour shifts or any kind of 12-hour shifts)
8 employees * 40 hours/week * 1.5 for employee benefit costs + 8 employees * 2 hours OT/week * 1.5 OT premium + 2-person coverage * 24 hours/day * 7 days/week * 0.07 absence rate * 1.5 OT premium = 539 hours/week

9 Employees with Relief Coverage and 2 Hours OT a Week  (rotating 8 or 12-hour shifts)
9 employees * 40 hours/week * 1.5 for employee benefit costs + 9 employees * 2 hours OT/week * 1.5 OT premium = 567 hours/week

10 Employees with Relief Coverage and No OT (rotating 8-hour shifts or any kind of 12-hour shifts)
10 employees * 40 hours/week * 1.5 for employee benefit costs = 600 hours/week

12 Employees with Relief Coverage and No OT (fixed 8-hour shifts)
12 employees * 40 hours/week * 1.5 for employee benefit costs = 720 hours/week

 

Comparing the cost of these four approaches, you can see that minimal staffing and using overtime to cover the absences is the cheapest. Since this may not always be the case, I recommend that you do a similar analysis using your own requirements, costs, and absence rates.
 

Impact on Employees
So far, we've only talked about the impact of reducing overtime on the organization. Did you know that employees sometimes can suffer too? This only occurs with 12-hour shifts and depends on the approach used to eliminate the overtime (see 12-hour Schedules with No Overtime for more examples):

 

1.   One way to eliminate the OT is to only work 3 shifts per week (36 hours). Although the employees would get 4 days off every week, the downside is their pay would be reduced to 36 hours a week.
 

2.   Another way to eliminate the OT is to replace a 12-hour shift in the 48-hour work week with an 8-hour shift. This only works if the organization can average the hours over a 2-week period. There is not much sacrifice for employees other than having to work an 8-hour p.m. shift every so often. This approach leaves an 8-hour gap in the coverage, but we're only discussing employee sacrifices here.
 

3.   Another way is to add a 4 hour shift to the 36-hour work week and replace two shifts in the 48-hour work week with a 10-hour and 6-hour shift. I’m not a big fan of shifts shorter than 8 hours because it means having to work so many extra days each week. If you have a long commute, it doesn’t seem worth coming to work for only 4 hours. With this type of schedule, you have to work 4 days every week, so you are losing one day off every 2 weeks. There are also two 4-hour gaps in coverage that the organization will have to address. 
 

 

Conclusions
Overtime in the schedule can have a significant financial benefit for the organization. Most employees don't mind the extra hours and appreciate the higher pay.

Overtime outside the schedule is an entirely different matter. For the organization, the benefits depend on the cost structure and absence rate. If the absence rate is especially high, it may be better to employ a larger staff and build relief coverage into the schedule. For the employees, the impact depends on the absence rates and overtime distribution policies. When overtime outside the schedule is not distributed evenly, some employees can end up working far more hours than is healthy or safe. You can read more about these types of situations and steps to address them here.

How is your overtime situation? A good rule of thumb is that overtime should be between 5% and 15% of the total labor hours. Want to know if your group would be better off with a small amount of overtime in the schedule? Want to know if you have enough staff to create relief coverage in your schedule? Click the link below.