5 Tips to Reduce Payroll Costs

What are payroll costs? If you have ever employed someone, you know that human capital - for most companies - is the highest variable cost. Employees are a continuous incurring cost to the company - materialized through direct rewards (wages and bonuses), and indirect benefits (PTOs, Insurance, and Overtime).

Although payroll costs are largely uncontrollable, there are actions every company and organization can take to ensure that money is not going to waste. Let’s discuss 5 different scenarios that could be inflating your payroll costs and how to avoid them.

Classifying Employees

Employee classification is the idea of compensating employees based on tasks, and responsibilities. Proper classification is crucial to a well-executed compensation plan. 

An employee may play different roles in the company. Some companies, for instance in construction, assign specific job codes to uniquely identify tasks. These codes connect a task to its specific compensation rate. This way, employees are compensated for the tasks they carry out.

As always, make sure that you’re staying within the legal framework applicable in your state. Classification of employees also saves companies money in the long-run by minimizing the risks of lawsuits. 

See Related: Calculating a fair price of labor

The Reality of Employee Turnover

The attrition rate, also known as the turnover rate, measures the rate at which employees are leaving your company. It is estimated that for every employee that leaves, the costs on employers are almost 2x their annual wage. 

The modern labor market allows for employees to often jump from one company to the other (job switching), in hopes of higher earnings and better working conditions. When firms are in competition to hire and retain good employees, it becomes tempting for an employee to always search for better instead of staying with a company for a long time, like the good old days.

Across all industries, 19% of employees leave companies only after a year. Employee turnover imposes varying costs, amongst others:

• Loss of Productivity

• Recruitment Costs

• Training Costs

• Impact on other Employees

To avoid high turnover, ensure good onboarding procedures, discuss long-term development, recognize hard work, and promote from within.

See Related: 10 Tips for Great Employee Retention

Could you be Overstaffed?

Staffing requires a delicate balance. As the company grows and there is more demand for services, it is natural to bring new employees on board. The problem arises when you no longer have enough work to go around for everyone. Idle employees are still on the payroll.

Too few workers limit your growth, while too many inflate your overhead costs. Overstaffing can impose rising payroll costs on employers. A clear indicator of overstaffing is high labor costs combined with low sales revenue. For anyone that has a clear understanding of accounting, the labor cost should be around 20 to 35% of gross sales. Quick Tip 💡

To determine what percentage of sales your labor costs are, simply divide your monthly, quarterly, or annual labor costs to the total sales of the same period.

There is hardly an easy way of dealing with overstaffing. We suggest being moderate with new hires, especially in times when growth is unpredictable or temporary. In the worst-case scenario, a company may have to call layoffs.

Experts suggest that as the bottom 10% of your employees leave, or are asked to leave, simply resist filling those positions and keep operations going with the team you have left, to avoid overstaffing on the long run.

See Related: How should you keep track of scheduling?

Subcontractor on Call

Subcontractors offer great flexibility, meaning that you are not obligated to have a constant working relationship with each other. Going back to the previous point, a clever way to avoid overstaffing is subcontracting. 

But, subcontractors are expensive. How do they help cut down costs? Well, companies are cutting down costs by 30% by subcontracting. Here’s how. 

A regular employer costs you a salary, payroll taxes, health insurance, 401(k), PTO, disability and unemployment insurance, overtime pay, and fringe benefits. Subcontractors? Hourly or project-based fees only.

See Related: In-house Crew or Subcontractors: What should you choose?

Automate, Automate, Automate… 

Automation is the elixir for inefficiency and high costs. Through automation, you automatically reduce your payroll costs by:

• Avoiding rounding errors

• Mitigating loss due to human errors

• Having accurate and instant data about employee PTO

• Calculating overtime automatically

• Tracking work breaks at an instant

• Having an inclusive overview of actual time worked

Additionally, you lower costs by skipping time-consuming and error-prone administrative tasks. Your administration person or team can get more work done in fewer hours with the help of digital tools like Atto. 

See Related: Best Time Tracking Apps for iPhone in 2020