How to reduce labor costs without layoffs

Labor cost is a major expense for businesses. In many industries, it’s even the biggest expense companies incur. This makes it a preferred target for cost saving initiatives when times are rough.

In the current economic climate, many businesses are looking for ways to reduce labor costs. But how can a company lower its labor cost without reducing staff and losing key team members?

In this blog post, we will look at:

• What labor costs are and why they are important,

• How to calculate labor costs,

• Different ways to reduce labor costs, and

• How to manage labor costs effectively.

Labor costs are the accumulated wages, salaries, benefits, and payroll taxes a business pays for its employees. There is a distinction between direct labor costs and indirect labor costs.

Direct labor is the cost associated with employees who are directly involved in the production of goods or the delivery of services that generate revenue. Indirect labor, on the other hand, is the cost of employees who are not directly involved in revenue-generating tasks, but fulfill important support functions.

Staff costs are an important cost center for businesses. Calculations show that labor costs can make up as much as 50% of a business’s revenue. Therefore, it’s in every business’s interest to manage their workforce costs effectively to prevent them from becoming exceptionally high.

Before taking any steps to reduce labor costs, businesses first need to know what their current workforce cost is. Calculating labor cost isn’t hard, but there are different cost factors to take into account.

Labor costs include:

• Wages and salaries,

• Overtime,

• Payroll taxes,

• Statutory and non-statutory benefits,

• Cost of employee training, and

• Bonuses and commissions.

A company’s total labor cost is hence the sum of all the different cost factors listed above.

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But how to lower labor costs without laying off employees. Here are nine employee cost reduction strategies that don’t require cutting headcount.

1. Meet your actual staffing needs to avoid overtime

Paying overtime is very costly for businesses. That’s because overtime must be compensated at higher rates—typically somewhere between 125% and 150% of the employee's normal pay rate.

Also, the higher the employee’s hourly pay, the more payroll taxes the business needs to pay, which makes overtime a very expensive option for businesses. An easy way to reduce labor costs therefore consists in avoiding overtime. This can be achieved through strategic workforce planning.

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2. Lower your workforce management costs

Workforce management tasks, such as payroll processing, managing PTO requests, and more, can be very time-consuming. Spending a lot of time on tasks that don’t generate actual revenue can feel like wasting time and money.

Organizations that are serious about reducing their labor costs should improve their workforce management processes. HR and payroll software can help automate manual tasks and save time. Depending on the size and structure of the business, outsourcing certain HR or payroll functions could also be more cost-effective than managing everything in-house.

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3. Reduce your hiring and recruiting costs

Hiring and recruiting expenses are indirect labor costs, and many businesses forget about them when calculating their actual staff cost. But since they can make up a significant share of an organization's total employee cost, it’s important to keep them under control.

There are different ways to reduce the cost per hire. They include using employee referrals for sourcing talent, optimizing the employee onboarding process, and leveraging automation in the hiring process.

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4. Lower your employee turnover rate

Employee turnover costs businesses a lot of money, which is why companies that know how to reduce their turnover can save real cash. In fact, the average cost of employee turnover is estimated to be between one-half and two times the departing employee’s annual salary.

Depending on their position and seniority, employees that leave the company can cause considerable costs. Therefore, reducing employee turnover is a great strategy for lowering labor costs. This is best achieved by improving employee retention.

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 5. Offer benefits instead of a pay rise

Employee benefits can be a great way of reducing labor costs if managed properly. Comprehensive benefits packages can help businesses attract talent without having to pay exorbitant salaries.

Offering benefits is typically also cheaper for employers than offering a pay rise. That’s because there are many highly-valued employee benefits that don’t have a monetary value (e. g. flexible working hours) or that are affordable to employers while still holding an important financial value for employees (e. g. additional insurance coverage).

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6. Hire from within

Internal hiring is a lot cheaper than hiring someone external and comes with the added benefit of not having to train someone from scratch. Employees who are promoted internally are already familiar with the company and are typically able to settle into their new role a lot faster.

In other words, they are likely to reach their full potential a lot quicker than any external hire ever could. Also, internal hiring allows businesses to reduce their external hiring needs to entry-level positions that require lower pay.

7. Improve employee productivity and engagement

Another way of reducing labor cost is to actually achieve more with fewer resources, i. e. employees. In other words, enhancing employee productivity so that the same number of employees generate more revenue.

One of the most effective ways to improve productivity at an organization is to foster employee engagement, for instance by implementing employee recognition initiatives. While this strategy does not reduce labor costs as such, it helps improve the business’s overall financial situation.

8. Cross-train employees

Employee absence causes a range of different problems at an organization, from tasks left unattended to workflows being interrupted, which then causes delays in important projects and more. Cross-training employees can help prevent problems related to employees being absent.

Employees who are trained in tasks outside their primary job responsibilities can easily fill in for absent colleagues. Also, cross-training employees enables them to pick up additional tasks whenever time permits.

9. Encourage remote work

Remote work can save businesses money in several ways, which makes it another employee cost reduction strategy to consider. The cost savings that can be realized with remote work mainly include reduced expenses for real estate, utilities, and cleaning services for the office building. But according to statistics, these savings can be quite significant (as in ‘several million dollars’ significant).

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There are different ways to reduce labor costs without cutting headcount. However, a one-off reducing-staff-costs initiative won’t solve the problem in the long run. Instead, businesses need to learn how to manage their labor costs effectively. Here are a few tips that can help you get there:

• Hire remote talent: Businesses with specific talent needs should broaden the geographic scope of their candidate pool and also consider applicants from other countries. Hiring remote talent in countries where labor is cheap can significantly reduce labor costs. An Employer of Record (EOR) can help businesses remain compliant when hiring abroad.

• Leverage data insights: Data insights gained from people analytics or payroll analytics tools can help businesses make informed decisions regarding staffing needs, workforce planning, and more. Basing important decisions on actual facts and hard numbers rather than presumptions and personal judgment helps avoid making bad decisions.

• Set up comprehensive labor cost reporting: In order to manage labor costs effectively, businesses first need to know what their current costs are. Setting up comprehensive reporting structures for workforce costs allows businesses to quickly access their labor cost data at all times and adapt their employee cost reduction strategy accordingly.

There are many different ways to reduce labor costs without having to lay off employees. By optimizing their workforce planning and improving employee retention, businesses can avoid costly mistakes, such as overtime and high employee turnover.

Rethinking the business’s compensation strategy and offering more benefits while cutting back on salary increases is another strategy that allows businesses to lower their workforce costs. Additionally, organizations should look into different ways to optimize their workforce management processes and cut costs through outsourcing and increased software use.

Ultimately, however, businesses shouldn’t forget that it’s not enough to just cut costs once and then forget about it. Instead, a long-term strategy for effective labor cost management is needed that is based on comprehensive, up-to-date reporting and insights into actual costs.