Controlling Labor Costs
For service businesses, labor cost is the largest expense that is incurred in business operations. For many other types of businesses, the cost of labor is a large component of overall costs. Controlling labor costs so that they stay in line with what’s best for the organization is an important management function. Here are several ways to control or reduce labor costs in your business.
- Encourage employee retention.
If well-trained employees leave, you must replace them with inexperienced employees that need training, resulting in a temporary loss of productivity. Some turnover can be good, but if it’s too high, it can result in increased labor costs.
- Automate tasks.
Save labor by automating any tasks that can be automated that employees are still performing. While some automation might require extensive capital outlays, many systems can be implemented that are not costly and that have an immediate return on investment.
- Streamline processes.
Are you operating your business most efficiently? Or are employees still doing tasks that are outdated or that have lost meaning over time?
One place to look is the interface between departments. Is your sales team duplicating marketing’s efforts? Is customer service answering the same question without communicating to operations how it should be permanently fixed? Enhancing communications among employees throughout the company can cut down on labor costs.
- Train employees.
Make sure employees are doing what they should be doing by training them. If they are using systems and other tools, make sure they have completed courses in those systems and tools.
- Provide the right tools for the job.
Do employees have the tools they need to do the job well? Be sure you’re providing them with the latest version of Microsoft Excel® versus an abacus, as an extreme example.
- Cross-train employees.
If an employee is out sick, does a customer’s job sit around until they are back? Check to see if your employees can easily pick up another’s work in the case one employee is out.
- Optimize employee schedules.
In many industries such as restaurant and retail, employee scheduling can make the difference between profit and loss. Software can help you determine how many employees you need and at what time. Ensuring employees know when to come in and what to focus on when they do will go a long way toward productivity as well.
In some cases, a shorter workweek is a possibility that can drive lower labor costs.
Outsourcing may be cheaper than using employees on certain tasks, especially if you have tasks that require specialized knowledge or skills, or you might not need a full-time person. Outsourcing can also help you determine how long a task will take so you can plan better if you do decide to take the activity in house.
- Review compensation.
Compare your company’s current salaries to the going market rate for salaries in your industry. Are your salaries in line? Adjust accordingly for future hires.
You can also consider different pay structures, such as commission-based, to better match performance to labor costs. Bonuses paid out in lieu of annual raises allows you to better manage accumulated pay raises in the case of long-term employees.
- Review benefits.
Employees love perks but they can be costly. If necessary, this is an area where expenses can be cut to reduce costs. This can include reviewing time off policies, employer’s percentage share of 401(k) plan contributions, and additional health care coverages such as dental and vision.
Hiring part-time employees that are ineligible for benefits can also be a way to cut labor costs.
- Cut overtime pay.
If overtime pay is so high that added headcount should be considered, then it’s too high. On the other hand, some overtime pay is fine if it avoids hiring a headcount you don’t fully need.
- Incentivize workers.
Try increasing productivity and results with incentives built into your compensation plan.
- Provide remote work options.
Studies show remote workers are more productive. Plus, overhead expenses such as rent, furniture, and utilities will plummet, saving expenses overall.
- Hire smart in the first place.
The saying is “hire slow, fire fast.” Finding the right worker for your business is pretty much an art form. Interview, test, check background and references, and put employees on a trial basis to be sure you have the best workers.
- Maintain a safe working environment.
Follow all of the regulatory requirements, but follow common sense as well to ensure you have a safe workplace for employees.
- Understand the accounting side of labor costs.
If you pay an employee $15 per hour, understand that your labor cost is far more than $15. Not included in that $15 is:
- Employer’s share of payroll taxes (Social Security and Medicare)
- Vacation and time off
- Paid holidays
- Workers compensation insurance
- Unemployment insurance (federal and state)
- Health care
- 401(k) matches
- Company picnics and events
- The cost of all other employee perks
The cost to keep an employee includes even more than labor costs and should include allocations for these expenses:
- Computer equipment and software applications
- Rent, utilities, furniture, parking spaces, building repair
- Employer-paid meals, snacks, and coffee
- Events and travel
- Meeting time and expenses (this deserves to be listed separately)
If you’d like us to help you calculate your labor costs per employee hour, please reach out.
Employees make your business possible, but to maintain a business profit, labor costs must be kept in line. Follow these ideas to keep your team productive and your labor costs in shape.