Reducing labor expenses is critical as costs rise.

5 Ways to Reduce Labor Costs

With thin margins, controlling the rising cost of hourly workers is vital in restaurants.

While businesses strive to increase revenue in a competitive market, the cost of labor continues to rise. According to a recent survey of U.S. businesses with hourly workers, increasing profit margins was the top business challenge, yet nearly half of respondents said they didn’t feel in control of their profit margins. When asked, “What are your best tactics to controlling profit margins?” A majority responded with the same answer: controlling labor costs.

So, what can businesses do to gain control over their profit margins by cutting labor costs? 

1. Review and adjust current compensation plans

Periodically evaluating your company's salaries, wages and benefits can help you to find several opportunities for cost reductions. First, review each of your roles with tools like Glassdoor or PayScale to see if you are paying employees above their average market value. Then, scale down for future hires to better match the market and for current hires, and create new programs that replace automatic pay raises with merit increases based on revenue-driving performance.

Consider switching sales roles to a commision-only pay structure, as many employees like the flexibility and income potential it provides. Additionally, changing a few roles from full-time to contract or part-time (under 30 hours per week) can enable your employees to widen their experience at other businesses while saving you on mandated health care coverage for full time workers. But a word of advice for these recommendations: be careful to ensure you are correctly classifying your employees to prevent lawsuits. You can also reach out to a health insurance broker to get lower cost bids for coverage or reduce the cost of health insurance by choosing higher deductibles.

2. Reduce overtime and other pay overages

All businesses know that overtime (over 40 hours per week) can quickly add up, as it’s time and a half of an employee's regular hourly pay. Even more, according to a recent SHRM article, wages in the U.S. are forecasted to grow by an average of 3.2 percent every year. This means if your hourly employee is earning $10 today, you’ll need to pay them $11.71 in 5 years, a 17 percent increase. For one employee who works 30 hours a week, that’s a $2,600 annualized increase just to stay wage competitive.

To help reduce wage and overtime costs, you can consider using more of your part-time employees or hiring temporary workers. There are also stress profile tools that can notify managers when employees are reaching the 40-hour overtime benchmark so that managers can structure schedules without overtime. A final note is you cannot exchange overtime for paid vacation time (unless a bill passes).

Time theft is a hidden labor cost where employees bill their employer for time they haven’t actually worked. This doesn’t necessarily mean your employees are stealing from your company, as it can be inadvertent, such as late starts, early finishes, long breaks, rounding of hours, and buddy punching (clocking in or out for a colleague who is not there). A study by the American Society of Employers estimates that 20 percent of every dollar earned by a U.S. company is lost to employee time theft.

Using a simple time and attendance app will accurately track time worked when your employees clock in and out (including breaks) and includes geo-tracking and photo facial detection settings to eliminate early clock-ins and buddy punching. These timesheets are then instantly synced to your payroll provider to save on administration time and costs.  

3. Reduce labor costs by optimizing schedules

The restaurant and retail industries know this challenge all too well. Either your business schedules too many employees during hours that don’t generate enough sales, or you don’t schedule enough staff to support spikes in customer traffic. Both situations can hurt your business as the former kills your profit margins, and the latter hurts the customer experience (i.e. future sales).

There is employee scheduling software available that can provide labor forecasting where you can integrate your POS historic sales data or enter your own parameters (such as employee availability, PTO, overtime stress profiles, training, and shift costs) to forecast the right amount of labor needed (and by function) down to the minute. These tools create the most optimized schedule that meets your profit targets.

4. Reduce employee turnover

It costs far more to lose an employee than to hire and retain great employees so take the time to invest in keeping your staff happy. If you need some tips to get started, you can check out our recent article on increasing employee engagement for great business results.

As millennials and Gen Zs are becoming the largest segment of the hourly workforce, and this group ranks “training and development” as their No. 1 reason for staying with a job, be sure to offer proper onboarding, ongoing training, and advancement opportunities. Change the perception of your business and roles to a career path rather than a short-term stint. For example, restaurants can provide career advancement opportunities, such as culinary training and sommelier certifications.

Cross-training employees is another best practice to growing your employees’ skill set while getting more done with less people per shift (i.e. saving on labor costs). It also gives the added benefit of empowering your employees to train the rest of your staff on their skills rather than having to pay for an outside trainer. And, if an employee does quit unexpectedly, you have plenty of employees with duplicated training, so you won’t have to spend money recruiting to replace the role.

5. Earn tax credits for hiring new employees

The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to businesses who hire employees from eligible groups with certain barriers to employment, and there is no limit on the number of employees submitted. This tax credit enables individuals to transition from economic dependency to becoming a self sufficient taxpayer. The maximum tax credit for participating businesses ranges from $1,200 to $9,600, depending on the employee hired, how many hours they work, and how much they are paid. Eligible employees include unemployed veterans, Temporary Assistance for Needy Families recipients, food stamp recipients, designated community residents, vocational rehabilitation referred individuals, ex-felons, supplemental security income recipients, summer youth employees living in empowerment zones, and qualified long-term unemployment recipients.

And remember, employee benefit programs like dependent care and education assistance as well as contributing to qualified employee retirement plans are tax deductible. 

Jason Walker/Deputy

Jason Walker is president, Americas at Deputy. He graduated from Virginia Wesleyan College with a bachelor’s degree in leadership and management and garnered previous experience as the executive director of corporate innovation at MarketSource Inc. 

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