What is shrinkage?
Shrinkage refers to the loss of inventory, revenue, or productivity that occurs between what is expected and what is actually realized. In payroll and workforce management, shrinkage typically means the difference between scheduled labor hours and the hours an employee is actually available to work. This can happen due to absenteeism, lateness, extended breaks, early clock-outs, or time theft.
In retail and restaurant settings, shrinkage can also include physical losses—such as theft, errors, or damaged goods—but in a labor context, it points to lost productivity and underutilized scheduled hours.
Types of shrinkage employers face
1. Labor shrinkage (schedule-based):
Occurs when employees are scheduled to work but don’t fulfill their full shift. Causes include:
- Absenteeism (unplanned call-outs or no-shows)
- Late arrivals or early departures
- Extended or unauthorized breaks
- Unrecorded PTO or sick leave
- “Buddy punching” or time theft
2. Inventory shrinkage:
In businesses that manage stock, shrinkage refers to missing inventory due to:
- Employee theft or shoplifting
- Supplier fraud
- Administrative errors (mislabeled items, incorrect counts)
- Damage or spoilage
3. Sales shrinkage:
Occurs when sales are lost due to operational issues, such as:
- Understaffing (leading to long wait times or abandoned carts)
- Inefficient scheduling or overstaffing (increased costs with no return)
- System errors (POS issues, discount misapplications)
Why shrinkage matters to employers
Shrinkage—especially labor shrinkage—has a direct impact on your bottom line. If you're paying for hours that aren't being worked or you’re losing inventory to error or theft, you're eroding your margins.
Here’s how shrinkage can affect your business:
- Increased labor costs: Paying for time employees didn’t actually work drives up your hourly wage spend.
- Reduced productivity: Scheduled hours may not translate to productive time, which affects customer service and team performance.
- Scheduling inefficiency: Shrinkage skews labor forecasts and may lead to understaffing or overstaffing.
- Profit loss: Shrinkage—whether from time theft or inventory loss—cuts directly into profits.
- Compliance issues: If time records don’t reflect reality, you could face penalties for wage and hour violations.
Common causes of labor shrinkage
Labor shrinkage is often unintentional—but not always. Common causes include:
- Unscheduled absences: Sick days, last-minute PTO, or no-shows
- Tardiness: Repeated late clock-ins, often going uncorrected
- Buddy punching: A co-worker clocks in for someone who’s not yet on-site
- Extended breaks: Employees take longer than scheduled without approval
- Idle time: Employees are clocked in but not actively working due to downtime, lack of direction, or overstaffing
- Poor time tracking: Manual timecards or outdated systems make it easy to miss inaccuracies
How to measure shrinkage
To calculate shrinkage in a labor context:
Shrinkage % = (Scheduled hours – Actual worked hours) / Scheduled hours × 100
- Example: If an employee is scheduled for 40 hours but only works 36, the shrinkage rate is:
(40 – 36) ÷ 40 = 0.10 → 10% shrinkage
Monitoring shrinkage over time helps you identify recurring patterns—at the individual, team, or location level.
How to reduce shrinkage
Reducing shrinkage starts with visibility and accountability. Here’s how employers can manage it effectively:
- Use real-time time tracking – Clock-ins and outs should be tracked digitally and compared to schedules.
- Review attendance data regularly – Identify trends and follow up with employees who regularly arrive late or leave early.
- Communicate expectations clearly – Set clear policies around punctuality, breaks, and shift coverage.
- Apply consequences consistently – Without enforcement, policies lose their impact.
- Use scheduling tools that account for past behavior – Forecast more accurately by factoring in known shrinkage patterns.
- Limit manual time edits – Require manager approval for time card changes to reduce fraud or casual misuse.
How shrinkage impacts payroll
If shrinkage isn’t addressed, you may:
- Overpay for labor that wasn’t worked
- Undercut your labor cost projections
- Process inaccurate payroll, potentially leading to wage disputes or compliance risks
- Lose visibility into true staffing needs, making it harder to scale
Shrinkage also impacts payroll reporting and overtime calculations, especially if employees appear to have worked more hours than they did. This creates risk during audits and tax filings.
How Homebase helps reduce shrinkage
Homebase helps you track and manage shrinkage with tools that integrate time tracking, scheduling, and payroll. You can:
- Monitor missed shifts, late arrivals, and early clock-outs in real time
- Set alerts for no-shows or excessive break time
- Auto-compare scheduled vs. actual hours before approving payroll
- Require manager sign-off for time card changes
- Pull reports to identify shrinkage trends across roles, teams, or locations
By bringing visibility and control to your labor hours, Homebase helps reduce waste and protect your margins. Explore Homebase Employee Scheduling to run a more accurate, efficient, and shrinkage-aware team schedule.