3 things to remember when calculating labor costs

Summary

• Calculating labor costs can be complicated, involving things like benefits, taxes, and overhead expenses.
  

• While labor costs are a natural part of running a business, there are ways to cut down on them without sacrificing employee or customer experience.
  

• Scheduling and labor forecasting software is vital for calculating labor costs accurately. 

A crucial part of any company’s profitability is calculating labor costs correctly. Whether you’re a small cafe, a chain of restaurants, or a global enterprise, you need to know how to calculate the cost of your labor and understand how it affects your bottom line. 

Here are three essential things to consider when trying to figure out how much you’re actually spending on labor, how to remain profitable, and how to ensure your employees are getting paid accurately. 

1. Labor costs go beyond wages. 

Obviously, wages make up the majority of your labor costs; however, you need to remember that you are spending much more on employees than just wages. 

For employee compensation alone, wages and salaries cost employers 69% of the total cost, while 31% accounts for benefits, according to the Bureau of Labor Statistics (BLS). On top of that, there are other things to account for, such as taxes and overhead costs. Here’s a quick rundown:

• Salary – As mentioned, this takes up a considerable portion of your labor costs. This is the monetary value that you pay your employee for the work they perform.
• Payroll taxes – Some of these are taxes withheld from the employees and are typically matched by employers by a certain percentage, including Social Security payroll tax and Medicare payroll tax. 

Meanwhile, there are payroll taxes that are shouldered by employers alone, such as the federal unemployment tax (FUTA).

In addition, you should also account for payroll taxes imposed on a state and local level.

• Benefits – Benefits such as paid time off, health insurance, and dental insurance also factor into your labor costs, particularly if the majority of your workforce is salaried.
• Overhead costs – These are costs associated with running the business, such as building costs, utilities, property taxes, transportation, and administrative costs. 

Clearly, calculating labor costs should be inclusive of both direct and indirect expenses. Direct expenses are for producing a product, such as the wages of people in charge of production or rendering your services. While indirect costs are supplementary to that, such as administrative staff wages and building and equipment costs. 

Navigating the different factors affecting your labor cost is complicated and laborious, but it’s vital to understand all the costs and expenses that go into it. Doing so helps you determine profitability, spot areas where you can save, adjust your pricing, and determine business feasibility. 

2. Yes, you can save on labor costs. 

A lot goes into labor, and, of course, most of its cost is necessary. However, the good news is that labor is your most controllable expense; this means that the easiest way to reduce your overall operating costs is to optimize where and how you are spending on labor. Here are some of the things you can do to cut down on unnecessary labor costs:

Eliminate time theft

Time theft occurs when employees receive pay for time spent not working while technically on the clock. Buddy punching, inaccurate clock-ins, falsifying timesheets, unrecorded breaks, and attending to personal affairs while on the clock are some of the ways time theft is committed. 

The thing about time theft is it can be difficult to notice since instances of it are typically small and irregular. But over time, these occurrences can balloon into significant dollars lost. 

Solving time theft ensures everyone is working when and where they should be. To do this, you need an airtight time and attendance system complete with geofencing, photo-ID clock-ins, and pin numbers. All of these measures and more help ensure the right people are recording their time accurately and truthfully. 

Also read: 5 ways employees commit time theft (and how to reduce them)

Build schedules based on demand

Accurate demand forecasting is the key to both saving on labor costs and improving your ability to meet customer needs. Knowing exactly where and when you expect high foot traffic or sales can prevent accidentally over or understaffing shifts. Being prepared also helps reduce instances of unnecessary overtime as you’re less likely to request staff to keep working after the end of their shift due to an unforeseen rush. 

This all sounds well and good – but how does one actually forecast demand? What factors go into it?

Webinar: How to Forecast Your Schedule Based on Demand

Well, a lot of factors affect demand and required labor. To have an accurate forecast, you need to look at things like historical sales, booked appointments, economic trends, weather, foot traffic, and more. A robust labor forecasting system uses machine learning to account for all of these factors. With it, you can paint an accurate picture of your upcoming demand and schedule your staff accordingly.  

Classify employees correctly

Managing labor costs starts with classifying employees correctly. Salary, benefits, tax rates, and eligibility for federal and state-based policies depend on their classifications.

Assigning the correct classification to employees is critical to paying them correctly and complying with labor laws. Therefore, you also avoid the risk of legislation and penalties due to non-compliance.  

Sync scheduling and time tracking

Tracking where you are overspending on labor helps solve a majority of your labor cost issues. By syncing your scheduling and attendance systems, you’ll be able to see variances on timesheets between scheduled time and actual time worked. At a glance, you’ll be able to quickly see the shifts where you are spending more than expected. 

Global pizza chain Domino’s saw tremendous success using this technique, reducing labor costs by 11% across Europe, Oceania, and Asia.

Case Study: Domino’s Pizza

Boost employee engagement

Employee engagement has a significant impact on the cost of your labor. According to Gallup, disengaged employees cost the world $7.8 trillion lost in productivity. That’s 11% of the global GDP. Aside from low productivity, poor employee engagement can also result in high turnover – this means increased recruitment, onboarding, and training costs. 

Webinar: How to Drive Engagement for Hourly Employees

While employee engagement programs usually come at a cost, that doesn’t mean you must break the bank for these initiatives. At the end of the day, it’s all about employees finding value in the work they do. Tailor programs that foster growth, flexibility, and good communication. Prioritizing these things doesn’t always mean hosting lavish events and activities; what’s more valuable is integrating regular feedback loops into daily workflows. 

3. Technology is vital to calculating labor costs, but…

You need to find a software system that suits your business; otherwise, it will just cause confusion, additional admin work, and potentially higher costs. When you use an inadequate system, you risk forfeiting a healthy ROI due to constant reworking and prolonged training expenses. 

When looking for an HCM platform to help you with labor cost calculations, here are a few functionalities you’ll need to consider:

Labor forecasting 

Go for a platform that has a robust labor forecasting capability. With solid labor forecasting, you can accurately schedule your employees according to demand. This, alone, can curb your labor expenses as you’re not at risk of over or understaffing, and you can keep overtime and differentials to a minimum.

Many platforms claim to have some form of labor forecasting, but not all are comprehensive enough. Look at how the platform forecasts and which factors it takes into account when creating demand predictions. Is it only creating predictions based on historical sales data? If so, there is a good chance it lacks flexibility and only looks at surface-level data.

Accurate time and attendance tracking

Time and attendance tracking is vital to paying people correctly, preventing time theft, and optimizing labor costs.

Make sure you go for a system that enables employees to clock in and out easily, whether on-site or out in the field. Another vital area is the speed by which these clock-ins are recorded on timesheets. A platform that can do it in real time would be ideal.

Determine how the system spots and flags potential issues with time and attendance. The last thing you want is to scour through timesheets manually to spot irregularities. 

Timesheet to payroll processing is another crucial element. What are the safeguards the platform has in place to ensure accurate computations? How easy is it to transfer approved timesheets to payroll? What’s the level of admin work needed, if any? 

Strong payroll system

Payroll systems have a basic but extremely important task: withhold necessary deductions, pay employees on time, and pay employees accurately. This might seem straightforward, but this whole process can be tedious when different employee classifications, benefits, and pay rates come into play. It can become even more difficult if scheduling and timesheet data have already been corrupted upstream due to poor time and attendance management. 

Labor compliance

To avoid costly DOL fines and class action lawsuits, you need to prioritize compliance with both federal and state wage and hour laws. Like forecasting, many HCM platforms claim to have some form of labor compliance feature. But not all are robust enough to keep pace with federal and state-based regulations. 

An ideal HCM system ensures compliance at every step of the employee lifecycle. This means it should be able to flag potential risks during employee scheduling, timesheet export, and payroll calculations. Furthermore, it should be consistent with any developments or changes in federal and state-based rules.

Employee engagement tools

How the platform handles employee engagement is another vital feature you should be looking for. Most HCM software help with sending out and processing employee engagement surveys. While that’s important, it also pays to have a feature that allows for more immediate feedback and employee recognition. It also pays to understand how they process the information gathered from these surveys and feedback loops so that you’ll know whether it would be beneficial in your decision-making process. 

Control your labor costs with Workforce.com

While it might seem like a daunting task to find a platform that covers all these areas, there is actually a fairly simple solution. 

Workforce.com is an HCM platform tailor-made for calculating labor costs for shift-based businesses. Within its ecosystem are tools for time and attendance tracking, demand-based employee scheduling, labor forecasting, labor compliance, employee engagement, HRIS, and payroll. 

Find out more about how Workforce.com can help you calculate labor costs by booking a call today.