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December 28, 2020 | Time and Attendance | Posted by Ascentis

How to Calculate and Lower Labor Costs

Labor costs are not only the largest overall expense for most businesses, they are also one of the most difficult to control. According to the U.S. Bureau of Labor Statistics, the combination of wages and salaries with health insurance and other benefits costs employers between $36 and $52 per hour, depending on the industry. The percentage of total costs represented by labor varies widely between industries, but in many cases anywhere from 20% to 40% is considered reasonable. In the healthcare industry, labor costs routinely account for more than half of an employer’s operating expenses. With those kinds of figures involved, it makes sense for employers to take every action possible to manage labor costs prudently. 

Calculating Your Labor Costs 

Before you can begin to manage your business’s labor costs, you need a clear understanding of what they are. In general terms, labor costs cover a wide range of expenditures, including: 
  • Employee wages (both hourly and salary) 
  • Overtime pay 
  • Paid time off (both sick leave and vacation time) 
  • Training and education 
  • Payroll tax 
  • Health insurance 
  • Employee wellness programs 
  • Supplies and technology 
  • Any other benefits 
The specifics of calculating these costs will vary from business to business and industry to industry. For example, one simple formula for calculating labor costs in the manufacturing and construction industries involves multiplying a workers’ hourly rate by the time that worker takes to complete production of a single unit of work (a manufacturer’s product or a construction task, for instance), resulting in a per-unit labor cost.  

A more elaborate calculation frequently used in industries like healthcare, hospitality, and retail involves adding up the total cost of all the expenses listed above, then dividing that total by the employee’s total hours worked, resulting in an accurate cost-per-hour. There are many different labor cost calculators available for many different kinds of employers, many of them adjustable to reflect the specifics of your organization and industry. 

How to Keep Labor Costs Down 

The most obvious method for reducing labor costs is to employ less labor, but layoffs are seldom the most desirable outcome for an employer. Fortunately, there are a number of other useful approaches to keeping labor spending in check. As a bonus, most of these methods have an added benefit of improving productivity or streamlining existing practices. 

Review Your Best Practices 

Taking regular stock of your organization’s policies and best practices is just a good idea all around, and it can be especially useful for reducing labor costs. If your business is relying on outdated practices like manual data entry, or using multiple platforms to manage employee hours and scheduling, there is a greater chance of human error leading to problems like overscheduling, unnecessary overtime, and time fraud. Upgrading your workforce management software and automating time and attendance functions are excellent steps toward more effective labor cost management. 

Take Advantage of Your Learning Management System 

The old workforce adage about it being more expensive to hire new talent than it is to keep the talent you have holds true. Diversifying your workforce’s skill sets is a reliable way to cut labor costs without taking drastic measures. Rather than hiring new employees to fill new roles or operate new equipment or technology, retraining existing employees can not only reduce labor spending, but also increase their engagement and empowerment. A strong, customizable learning management system can help your workers evolve their skills to keep pace with your industry.  

Get a Handle on Overtime 

Overtime pay represents a minefield for many employers. Not only is it one of the most expensive aspects of payroll, it is also one of the most heavily regulated. Keeping a close eye on overtime hours is essential to preventing both overspending and potential fines and sanctions from federal, state, and local authorities. An automated, customizable time and attendance software with an easily accessible, one-stop dashboard can go a long way toward reducing unnecessary overtime while maintaining compliance across your organization. 

Institute Flexible Scheduling 

The past year has forced a lot of employers to re-evaluate the ways they approach scheduling employees. In industries such as manufacturing, construction, and healthcare that have less possibility for remote work, many employers have compromised by instituting flexible scheduling options and adding shifts. Those lessons can be used to control labor costs beyond the pandemic. Using scheduling software to have larger or smaller volumes of workers onsite depending on the volume of work and the specific jobs that need doing not only reduces labor costs, but can also boost productivity and efficiency across the board. 

Ready to start working toward lower labor costs for your organization? Learn more about the many ways Ascentis time and attendance solutions can help you manage your employees in a more efficient, effective, and compliant way.