Reducing labor costs in your business is a touchy subject because it directly impacts your employees. The subject must be tackled with clear communication, compassion, and consideration.
Before jumping straight to cutting staff members, consider other ways you can cut back on labor costs, like reducing turnover, shortening your workweek, and improving workflows.
16 Ways to Reduce Your Small Business’s Labor Costs
There are many different ways to reduce your company’s labor costs. As a business owner, it’s up to you to determine how to maintain a healthy profit margin while balancing the needs and expectations of your employees. It’s important to explore your options before making any decisions that will impact your staff members’ employment or compensation.
1. Review Compensation
Reviewing compensation doesn’t necessarily mean you need to start reducing staff salaries. Instead, it can mean reevaluating how you compensate your staff in the future.
For example, if you typically offer annual raises, this year you may want to offer performance bonuses, additional vacation time, flexible hours, or remote work options instead. Although these aren’t the salary increases your employees may hope for, they’ll likely be met with more enthusiasm than a wage decrease or a round of layoffs.
These types of compensation won’t increase your year-over-year spending and holds salaries the same. Plus, staff members will still be compensated for their performance, even if it’s not in the way they expected.
You can even give your employees an option. For example, you can offer employees either additional vacation time or a performance bonus determined by their ability to meet a certain goal.
2. Reduce Turnover
If you have high turnover, you already know it costs you a lot of money. It takes a lot of resources to find, hire, and train a new employee, and the more frequently you have to do it, the higher your turnover costs.
Fortunately, you have at least some control over employee turnover. Steps you can take to reduce employee turnover include:
- Have a comprehensive hiring process
- Offer competitive compensation
- Provide opportunities for growth
- Monitor employee motivation and engagement
- Understand why turnover has happened in the past
- Offer a healthy work-life balance
Not only do long-term staff save you money in turnover costs, but they’re also well-versed in your business and industry, improving their efficiency and productivity. Focus on hiring high-quality employees and build your perks and benefits around what matters most to your staff members to keep them happy, satisfied, and engaged.
3. Hire Well
Hiring well is a great way to reduce turnover, and also comes with other cost-saving benefits. By hiring the right staff members for the job, you’ll get employees who are better qualified and more effective when it comes to job performance.
Although experienced candidates may cost you more upfront in terms of salary, their productivity and efficiency will be worth it, especially when compared to the training costs associated with showing inexperienced hires the ropes.
Putting more time and effort into hiring and employee retention ensures the staff members you do add to your team are right for the job and that they have the know-how and skills to hit the ground running. Well-suited staff members are more likely to stick around — meaning less money spent on replacement costs — and tend to be happier, more effective employees.
4. Cross-Train Staff
If your business has tasks that can be done by anyone, train everyone to do them. Cross-training staff ensures your business’s most vital tasks get taken care of even if someone calls in sick or hands in their notice.
Cross-training helps your business to run smoothly and can save you from costly delays or oversights. For example, if all of your staff members know how to process wholesale orders, big orders can be taken care of when they’re requested, not when one key person comes back from vacation.
Cross-training also means your staff members can be productive at all times, not only when there’s a customer who requires their skill set.
While this approach won’t work for specialized tasks or positions, it does come in handy for basic, day-to-day duties that keep your business running smoothly and turning a profit.
5. Cut Down Your Workweek
Shorter workweeks are becoming more and more common, with some businesses opting for fewer workdays each week and others choosing fewer hours per day. How you approach it is up to you, but less time spent in the office or at the shop means less money spent on labor expenses.
Consider offering a reduced workweek as an option to staff members. You may be surprised by how many of your employees choose work-life balance in exchange for a slightly lower salary.
6. Hire Part-Time Workers and Temps
Part-time and temporary workers only work when you need them to, whereas full-time staff get paid for full-time hours regardless of whether you have work for them to do. For new or replacement roles, consider hiring part-time employees or temps to save money.
Not only will you save on labor costs through hourly wages, but you’ll likely also save on benefits and other staff expenses depending on how many hours your employee works and what you provide.
7. Restructure Fixed Salaries
Restructuring fixed salaries sounds more ominous than it really is. Instead of simply reducing your employees’ salaries, which will cause disengagement, demotivation, and even turnover, consider offering performance bonuses and commissions instead.
This ensures staff members are only paid additional amounts when your company is profitable.
For example, let’s say you have a salesperson who has a base salary as well as a 5% commission on the sales they make. Ask them if they’re willing to take a lower base salary in exchange for a higher commission, like 10%. That way, you’re paying them more when they bring money into the company, instead of all the time.
Alternatively, introduce performance bonuses to other full-time employees in lieu of salary increases or in exchange for a lower salary. Set goals for them to meet that are based on the profitability of their role or department, whether it’s reducing costs or increasing sales, and reward them based on whether they meet their goals.
This way, you’re rewarding staff for a job well done when the company is doing well.
8. Improve Workflows
Bottlenecks, disorganization, and lack of structure cause inefficiency that can waste time and money. Simply reviewing your business’s processes and workflows could save you a significant amount of money and foster more productive and effective employees.
Meet with your staff members to determine the biggest issues in your workflow and brainstorm how to better approach them. Pay special attention to outdated processes and unnecessary bottlenecks to figure out what the biggest time wasters are, then build a plan to optimize your workflows to save time, money, and headaches all around.
Technology has provided us with a variety of software platforms that can handle everything from accounting and customer service to social media posts to employee scheduling. It’s safe to assume that there are at least some aspects of your business that could stand to be automated.
Automation doesn’t have to mean cutting staff. Instead, automation can help your team to streamline their workflow, giving them more time to work on higher priority tasks, which will increase productivity.
If you do have to move forward with layoffs or lose a staff member to turnover, automating some of the processes and tasks that were handled by former employees will likely save you money as well. Although most platforms come with monthly or annual subscription costs, they’re typically much less than you would pay in staff wages.
Just because you need someone to manage your company’s social media pages doesn’t mean you have to hire a full-time social media manager. There are specialized freelancers and contractors who have the experience you need without a full-time commitment.
When possible, outsource specialized, part-time tasks to professional freelancers instead of hiring someone to work in-house. When the project is over, you may no longer have a use for a highly specific skill set.
Outsourcing is also a way to determine your hiring needs. For example, if you aren’t sure if hiring someone for a full-time position is necessary, outsource it to get a feel for how much work really exists. If the work ends up being consistent and ongoing, consider hiring an employee. But if it’s sporadic or temporary, outsourcing may be your best option.
11. Go Remote
Labor costs often include furnishing, heating, cooling, and otherwise maintaining an office building or retail space. If possible, transition to a remote workspace to save big on expenses like commercial rent, utilities, and hardware.
You don’t even have to make the transition full-time or for all of your staff. Even downsizing to a smaller space to accommodate essential staff or allowing for remote work part-time can make a difference.
Flexible work options also improve staffing issues like retention and turnover because you can select candidates from a larger hiring pool. And work-life balance will help to attract top talent.
12. Incentivize Productivity
Productive employees are profitable employees, so it makes sense to incentivize your staff members to be as efficient as possible. Offering incentives to your employees is an ideal way to encourage them to work harder, faster, and more effectively.
After all, who doesn’t like to be rewarded for their achievements?
Incentives can be anything from additional time off and bonuses to team lunches and company swag. Whatever suits the goal, your budget, and the staff members you’re hoping to motivate.
Incentivizing productivity ensures that the time your employees spend on the clock is purposeful and productive, saving you from wasting money on idle hours.
13. Reduce Overtime
Overtime is a costly and inefficient way to meet deadlines and run a business. Ideally, you want to get all the necessary work done during the workday so you don’t have to foot the bill for additional wages.
If you find that your business needs consistent overtime from employees, it’s time to review your priorities, staffing requirements, and productivity. Ask yourself:
- What is the main cause of overtime hours?
- Can overtime be reduced by adjusting workflows, changing schedules, or cross-training?
- If overtime is caused by deadlines, are they reasonable or even necessary?
- Will automation improve potential bottlenecks, such as production time?
- Are you understaffed in a specific department?
Determine the main cause of overtime hours in your workplace and think about how you can reduce it. It could be as simple as optimizing staff schedules or reevaluating an outdated process.
Alternatively, if the overtime is both necessary and temporary, consider waiting it out instead of hiring a new full-time employee. Sometimes overtime costs are temporary based on deadlines or quirks of the workflow, but hiring a new staff member is a longer — and more costly — commitment.
14. Optimize Schedules
Optimizing staff schedules can do wonders for your business’s efficiency and productivity. But it takes more than just choosing which staff members work at a given time. Analyze your business’s working hours to determine which days and times are the busiest, and which skills they typically require.
Ensure that you don’t schedule too many or too few workers at once to avoid costs associated with unproductive employees or overtime.
15. Reduce Employee Benefits
Another way to reduce labor costs is to cut back on employee benefits like pension plans, health insurance, and other perks. You don’t have to get rid of them altogether, but by reviewing what you and your staff members are paying for and paring them down, you can significantly cut down your expenses.
Just make sure that any changes you make to benefits apply to all staff members.
16. Consult Human Resources
Before you make any decisions, speak to your human resources team. They’ll be able to give you advice when it comes to any cost-reducing measures that will impact your employees, including helping you to approach any necessary layoffs in the proper manner.
They’ll also be able to help you to determine how to approach remote work, reevaluating benefits, reducing turnover, and building out successful and effective hiring and onboarding plans.
As a small-business or startup owner, you’re probably working with a lean budget. And unpredictable circumstances like market fluctuations, supply issues, or employee turnover can wreak havoc on your profitability.
If you find yourself in a position where you need to consider how to cut down on your business costs, don’t jump straight to mass layoffs and staffing changes. Instead, consider alternatives such as reviewing compensation, outsourcing specialized tasks, and reducing overtime to come up with an impactful and compassionate plan to reduce your labor costs.