14 Solutions for Controlling Labor Costs

14 Solutions for Controlling Labor Costs

While the cost of labor is a significant expense for many business models, for those that are service-based, labor cost is the largest expense incurred in business operations. Controlling labor costs so that they stay in line with what’s best for the organization is an important management function. We outline a few ways you can control (or reduce) labor costs in your business.

1. Encourage employee retention.

If a well-trained employee leaves, their institutional knowledge of your business leaves with them. The process of replacing them results in a temporary hit to productivity across the board: you must spend hours recruiting, hiring, and then onboarding a new employee, and they’re likely to need training and experience to get up to speed. Some turnover can actually be good, but if it’s too high (which is the case for many in the era of the Great Resignation), it can result in increased labor costs. 

2. Automate tasks.

Save labor by automating any tasks that have the capacity to be automated. While a few automations could require extensive capital outlays, many systems can be implemented that are not costly and have an immediate return on investment. Your QuickBooks file is a great place to start. Integrations of native software and feeding of transactions are just two examples.

3. Streamline processes.

Are you operating your business most efficiently? Or are employees still performing tasks that are outdated, nearly irrelevant, or unnecessarily redundant?

A great place to start when searching for inefficiencies in your company is the interface between departments. Is your sales team duplicating some marketing team efforts? Is customer service answering the same question repeatedly without communicating to operations how it should be permanently fixed?  Enhancing communications among employees throughout the company can increase visibility and cut down on labor costs.

4. Train employees.

There’s only one way to ensure employees are doing what they should be, and that’s to spend time training them. Many of the technologies you likely use have created training modules and certifications that employees can partake in for free. If your team frequently uses systems and other tools, consider enrolling them in training courses.

5. Provide the right tools for the job.

Do employees have the tools they need to execute deliverables effectively? Keep an open dialogue going about what is and isn’t working in the context of internal processes and technologies. Many times, employees will continue performing a task inefficiently because they either don’t realize a bug in the software can be fixed, they don’t have time to stop and troubleshoot a program, or don’t realize there’s a more efficient way to complete the job. Opening communication around the subject can lead to innovation and improved morale.

6. Cross-train employees.

If an employee is out sick, does a customer’s job remain stagnant until your employee returns to work? Check to see if your employees can easily pick up another’s work in the case one employee is out. If they can’t, create an opportunity for cross training once they return. A recorded training session (with a screenshare when necessary) is a great way to train team members, and saving the recording to the customer’s file means that in the future, anyone who needs to can step in and complete the job with relative ease.

7. Optimize employee schedules.

In many industries such as restaurant and retail, employee scheduling can be 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. In some cases, a shorter workweek is a possibility that can drive lower labor costs, as is leveraging employees’ individual “magic hours,” or the times of day they’re personally most productive.

8. Outsource.

Outsourcing may be cheaper than using employees on certain tasks, especially those requiring specialized knowledge or skills. Outsourcing can also help you determine how long a task will take, which allows you to plan better in the event you decide to take the activity in house once again. 

9. 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. It’s also important to consider compensation in the context of employee retention; while bonuses paid out in lieu of annual raises could allow you better management of accumulated pay raises for long-term employees, your team may value receiving a raise over a bonus.

10. Review benefits.

Benefit packages are a great way to encourage employee retention, but they can become costly. If reducing costs in this area is a necessity, consider reviewing time off policies, shopping for new health insurance rates annually, or reevaluating employer’s percentage share of 401(k) plan contributions. 

11. Review overtime pay.

There are two sides to overtime. On the one hand, some overtime pay can help you avoid the cost of hiring a headcount you either don’t need permanently or don’t need full-time. On the other, if overtime pay is so high that you’ve considered adding additional personnel, then your overtime pay is too high. We can help you evaluate when it’s time to hire.

12. 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.

13. Hire smart in the first place.

The saying is “hire slow, fire fast.” Finding the right worker for your business is an art form. Interview, test, check background and references, and put employees on a 90-day trial basis to be sure you have the best workers.

14. 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-sponsored events, like holiday parties, team building experiences, educational conferences, or planning retreats

There are also infrastructure-related costs associated with retaining an employee, such as:

• Computer equipment and software subscriptions
• Rent, utilities, furniture, parking spaces, building repair
• Employer-paid meals, snacks, and coffee
• Meeting time and expenses 

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 frequently reviewed. Follow the suggestions above to keep your team productive and your labor costs in shape.