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Six Strategies for Reducing Labor Costs

03/10/2022 Beth Vice

Do you ever feel like there must be a better way? That some of the things your company is doing are not as efficient as they could be?

In today’s economy, when many companies are facing decreased demand for their products and services, it is critical to reduce costs and increase productivity wherever possible. And you probably know that labor is one of your largest – if not the largest – controllable costs.

Here are six strategies for reducing the cost and maximizing the productivity of your labor force.

1. Combine vacation and sick leave in one paid-time-off bucket.
By combining paid vacation and a reduced amount of sick leave, you can reduce your costs associated with absenteeism.

For example, if you provide two weeks annual paid vacation and two weeks sick leave, instead provide three weeks paid time off. No questions asked about how people are using it.

This also enables you to offer employees a more attractive paid vacation benefit, and saves you the headache of trying to determine whether someone is really sick or just “taking a mental health day.”

Sure, employees who never use sick leave will now be getting an extra week off, but at least you are rewarding your more productive employees. And you will make it up in employees taking fewer sick days because they don’t want to use up their vacation time.

2. Automate your time and payroll system to pay employees accurately.
Your current timekeeping and payroll system could be costing you money if it does not automate the calculation of complex pay rules. There is a lot of room for human error when calculating such factors as overtime, premium time, government regulations, company policies and collective bargaining agreements.

For example, if an employee’s shift “straddles” a regular day and a holiday, such that the employee should receive four hours of regular pay and four hours of overtime, will the manager always catch that? Or will the manager, without thinking, pay it all at the same rate, which means either overpaying or underpaying the employee?

3. Eliminate ‘buddy punching.’
Buddy punching is the practice in which one employee punches the clock for another to hide the latter’s tardiness or absence. This practice has been found to inflate payroll by 2.2 percent on average. If you have 1,000 employees with an average salary of $40,000, this comes to $880,000.

The best way to eliminate this practice is biometric verification, in which time-punch terminals match fingerprint signatures with coded badges. This system should pay for itself the first year.

4. Use overtime strategically.
Overtime should not be used for managers’ convenience or as a perk for employees. It should be used only when it provides greater returns than it costs.

Overtime can be a cost effective tool to make your work force more flexible. For example, overtime can be used to increase capacity temporarily without adding to headcount. But it can also mask problems such as production delays that are caused by supplier problems, aging equipment or employee-induced bottlenecks.

An automated time and payroll system, as mentioned above, can be configured to track how overtime is being used.

5. Put answers to employees’ administrative questions online for self-service.
Managers, supervisors and HR staff typically spend a large chunk of their time responding to repetitive questions from employees. These include questions about paychecks, vacation usage, 401(k) plans, healthcare coverage and various company policies.

This kind of information could be provided on your intranet at little cost, freeing management for more productive work.

6. Use continuous improvement programs to increase productivity and reduce waste.
Continuous improvement programs such as Six Sigma can do a lot more than they are typically used for. Use them to optimize your production processes by more precisely measuring the time employees spend on direct and indirect activities. They also can be used to identify supply chain inefficiencies, insufficient training and a host of other sources of waste.

In the short run, you may not be able to do much about lower demand for your company’s products or services, but you can make a dent in your labor costs and productivity with some innovative changes such as those described here.

For additional information or guidance related to this article, contact Beth Vice at bvice@vlcpa.com or 800.887.0437.

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