How to reduce labour costs (without firing anyone)

Labour costs are one of the biggest business costs, usually accounting for something between 10-35% of your total revenue.

When times get tough, staffing costs are one of the first areas to fall under the spotlight.

If you're under pressure to get back in black quickly, your options are limited. You can't easily move to cheaper premises. Utilities, tax bills, and other contracts are all tricky to deal with at short notice — and might not resolve the problem in the long term.

Redundancies immediately slash one of your biggest business costs — it's no wonder that so many struggling companies show their staff the door when a financial crisis is imminent.

But laying people off isn't always the answer. In fact, it could do more harm that good...

The true cost of redundancies

If your only concern is short-term, direct costs, then redundancies make perfect sense. However, if you look at the many longer-term and indirect costs of redundancies, you'll soon find that the numbers aren't quite so appealing.

• Loss of morale - your remaining staff will be distracted by layoffs within the company
• Increased turnover - your remaining staff will start looking for jobs - no-one wants to work at a failing company
• Loss of skills - you may struggle to complete certain tasks to the same standard
• Communication issues - who is responsible for the tasks that the former staff member carried out?
• Training and recruitment costs of positions that might need refilling in the future

Striking staff off your payroll isn't your only option for reducing labour costs.

Overtime

In the retail and hospitality sectors, overtime can significantly inflate your labour costs. Regularly topping up staff pay with time-and-a-half or double-time overtime pay carries huge costs for your business.

Clock-outs even fifteen minutes late soon add up if 50 employees a day do this for half of their six shifts a week.

Here's how to reduce overtime costs:

• Restrict early clock-ins. Limit these to five to ten minutes before a shift. If you use a time and attendance system, it's easy to restrict clock-ins to your liking. Some staff may be frustrated by these restrictions, so be sure to communicate the changes with all employees.
• Reduce timesheet fraud. Payroll fraud costs UK businesses £12 billion a year. Adding a few minutes to paper timesheets might not seem particularly harmful, but again, these small inaccuracies soon add up - particularly where overtime is concerned. Using an electronic system can significantly reduce timesheet fraud.
• Change overtime policies. What worked for your business a year ago might not be the best option now, particularly if you've grown. Consider offering time off in lieu if you don't already.
• Improve rota planning. Are you spreading your hourly staff too thin? If overtime is a persistent problem at your business, particularly during certain shifts, you might need to take a closer look at your rota.

Making changes to overtime policies isn't going to go down well with your staff, so it's important to be transparent about the reasons behind the changes.

Apply them equally to all staff, and check the results of your changes after one month, three months and six months. Adjust your overtime policy (and its enforcements) as needed.

Wage cuts

This option isn't going to be well-received, but it can be effective in the right circumstances. We recommend asking staff to take 2-5% pay cuts only in the following circumstances:

• Your employees are extremely loyal
• Your staff salaries are above market rates
• You're transparent about the company's financial woes and the alternatives (layoffs)
• You have a credible long-term plan for resolving your financial problems
• Your employees love working for the company

To summarise, if you can show employees that the wage cuts are in their interest in the long term, they might just be willing to stick around.

Pay freeze

If you don't want to take such a severe approach, freezing pay is a good option. You'll need to tick the boxes we mentioned above, or your staff will move on.

Remember to be transparent about the reasoning behind such a move.

Cut perks

You might not include perks such as free meals or office stationery under your labour budget, but these costs are undoubtedly directly related to the number of employees you have on payroll. Again, be honest with employees about why you're cutting back.

Cutting perks may significantly change the culture at your workplace. You must account for the turnover this could cause and adjust your recruitment strategy appropriately.

Recruitment freeze

Recruitment freezes aren't just a tool to manage labour costs, but can also be used to figure out how best to reorganise your company during times of change.

A prolonged recruitment 'pause' will cause more problems than it solves - staff workload will increase, and morale will fall.

Your recruitment freeze should, therefore, contain some degree of flexibility. It's also best not to set an arbitrary cut-off - particularly if it's the start of the next financial year (other companies will be doing the same, leading to a more competitive labour market).

Recruitment freezes work best for larger companies with dozens or hundreds of employees.

Offer new perks instead of a pay rise

If you've set a precedent of offering a significant pay rise each and every year, it's difficult to break the habit. Employees will rightly be disappointed if the rise they expected doesn't materialise.

If you're in this position and need to cut labour costs, you can make a smaller pay rise or pay freeze more palatable by offering new perks and benefits as an alternative.

These perks could be anything from flexitime or compressed hours to free lunch on a Friday or free gym memberships.

Choose perks that are relevant to staff needs and wants - this is especially important because you're offering them instead of cold hard cash.

Even if employees figure out that you're offering perks to save money, they'll still appreciate that you tried to soften the blow.

Overall, it's best if you're upfront about the reasons for changing your approach.

Training

Cross-training involves training employees in multiple skillsets so that they can fill several roles within the business. This added flexibility reduces the headache of rota planning as well as the need to recruit for specific roles.

It's generally cheaper to manage a single employee on a 20-hour contract instead of two employees on 10-hour contracts, so if you get the chance to train an employee to handle multiple roles, take it.

Of course, investing resources in training only works if you have the luxury to do so in the short term.

Offer reduced hours

Some staff might voluntarily take a cut to their hours (and their pay). Maybe they have childcare commitments, or they'd like to dedicate more time to their side-project.

You might be surprised at the number of employees who'd like to reduce their hours.

Sure, this approach might not work so well in companies where the vast majority of staff are on part-time hourly contracts already, but if your employees work to standard office hours, you should see some success with this measure.

Most importantly, be sure your business can handle fewer staff hours on the rota.

Offer unpaid leave

For a short-term reprieve from labour costs, offering staff the chance to take unpaid time off can be a win-win.

Your employees may be burnt out, want some time off for travelling, or need to work on other aspects of their life such as moving house or training a new puppy!

Reassure hourly employees that they won't lose out on work in the future if they take unpaid time off now.

Again, ensure that your remaining staff can handle the workload before you approve the leave.

Salary sacrifice schemes

Salary sacrifice schemes take some administration, but you can see significant reductions in wage costs if you implement them successfully. For example, offer employees the chance to 'buy' extra holiday by deducting small portions of their monthly pay in exchange for one or several extra days off.

It's important to note that UK rules around salary sacrifice schemes and National Insurance Contributions have changed a lot in recent years, so you won't quite see the same cost savings as you once did.

However, there are definitely still direct and indirect benefits to be gained from offering these types of schemes.

Improved rota planning

If your workforce largely consists of hourly workers, getting the right staff in the right place at the right time is key to managing labour costs.

If you don't already, start using past sales data to forecast your labour requirements for each day. This'll help you learn which days you can cut back on labour, and which days require more shifts.

Don't just rely on data; speak to staff and find out which shifts tend to be quietest. Adjust future rotas accordingly.

Final thoughts

The living wage rise may spell problems for some companies in the hospitality and retail sectors, but redundancy isn't the only answer to spiralling labour costs.

Voluntary measures should be the starting point for most businesses - whether it's voluntary unpaid leave or hour reductions — but you'll probably need to follow these with less palatable measures.

Don't discount the value of improved rota planning, either. If you're not sure where to begin, see what RotaCloud can do for you.

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