Efficient Strategies to Significantly Reduce Labor Costs

November 30, 2023

by Malysa O’Connor

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Labor is typically one of the highest costs for businesses that employ hourly workers. Beyond wages, labor costs include benefits, taxes, insurance, and other expenses. Businesses must know how to control costs without compromising employee experience.

Effectively reducing labor costs without sacrificing quality or service requires strategic planning.

Strategies like leveraging emerging technology to automate processes, streamlining operations, and reducing turnover can not only help reduce labor costs but boost productivity. Learn how to manage time and schedules, maximize efficiency, and optimize sales, all while controlling labor costs.

Reducing Labor Costs: Key Takeaways

  • Labor is essential for all businesses but can be costly. Some costs you can’t control, but others can be planned for or eliminated.
  • Consistent scheduling, budgeting labor that is enforced in schedules, reducing unplanned overtime and turnover, and motivating your employees are all ways to reduce the cost of labor without cutting workers.
  • Intelligently automated WFM makes it easier for retailers to implement these adjustments.

What Does “Labor Cost” Entail?

Labor is a significant (but necessary) expense for any business, especially for retailers. It can be broadly categorized into two types: fixed labor and variable labor.

Fixed Labor

Fixed labor costs remain constant regardless of the volume of your company’s goods or services. For example, salaries and wages are predetermined amounts paid to employees irrespective of their performance or output.

Fixed labor costs provide stability for employers and employees but may offer little flexibility when demand fluctuates.

Variable Labor

In contrast, variable labor costs change with the level of production or service provision, including overtime pay, bonuses, and commissions—essentially any form of compensation that varies based on employee performance or work hours.

Variable labor allows businesses more flexibility to scale up or down as needed but can also lead to unpredictability in budgeting.

Components of Labor Costs

The components contributing towards total “labor cost” include:

  • Salaries and Wages: These make up the bulk portion of your company’s total workforce expense; it’s what you pay your staff regularly for their time and effort at work.
  • Benefits and Other Perks: Benefits such as health insurance contributions, retirement plans, etc., add significantly to overall employment expenses.
  • Overtime Pay: This is an essential component, especially in industries like retail, where unplanned overtime often occurs due to unpredictable customer traffic patterns.
  • Taxes Associated with Payroll: Employers are responsible for several payroll taxes, including social security and Medicare, which add to overall labor costs.
  • Overhead: This includes indirect costs associated with employees such as office space, utilities, equipment, etc.
    Compliance Penalties: If labor laws aren’t adhered to correctly, penalties will inflate your labor costs.

How to Reduce Labor Costs

Controlling labor costs is a key path to bigger profits in retail. A 1% improvement in labor optimization can result in millions in savings. Transforming labor operations and controlling costs starts with accurately and precisely predicting demand for each location and customer touchpoint by creating optimal schedules.

Strategically managing your workforce can save money while preserving and boosting employee morale and customer service.

Start with an Accurate Plan

Strong operational execution starts with creating a long-term labor budget and an optimal labor plan. Data-driven demand forecasting lets you get highly accurate granular forecasts. With automated labor budgeting and demand forecasting, you can increase operational efficiency and create the perfect plan, setting long-term budgets and weekly demand forecasts across all customer touchpoints.

Create Consistent and Predictable Schedules For Employees

One way to manage labor costs effectively is by creating consistent and predictable schedules for your employees.

  • Meet Predictable Schedule Requirements: Predictable work schedules allow better work-life balance for employees, positively impacting their work performance. Accurate demand forecasts can result in more stable rosters without sacrificing business needs.
  • Reduce No-Shows: No-shows can be costly in terms of lost productivity and increased workload on other staff members. Create reliable schedules that suit employee preferences to reduce the likelihood of no-shows.
  • Meet Meals and Break Requirements: Consistent scheduling allows managers to plan breaks, ensuring compliance with regulations while keeping employees satisfied with their work-life balance.
  • Avoid Clopening Shifts: The practice of ‘clopening’—where an employee closes the store late at night only to open it early the next morning—is a compliance violation and can negatively impact worker well-being. Predictable scheduling can help you be sure to provide enough time between shifts.

Meet Labor Budgets

As C-suite and HR leaders in large-scale retail companies, you understand the importance of meeting your labor budgets without compromising service quality or employee satisfaction. With Legion’s Workforce Management Software, it becomes a seamless process.

  • Automated Scheduling for Optimal Staffing: Reduce unnecessary labor costs with effective scheduling. Advanced machine learning algorithms help automatically create schedules that meet budgetary constraints while ensuring optimal staffing based on demand forecasts and employee skills and preferences.
  • Budget Enforcement Within Schedules: Managers should be able to monitor real-time employee hours and identify potential overtime situations before they occur.
  • Labor Law Compliance: Your WFM system should consider company policies and local labor laws when generating schedules, thereby minimizing compliance risks associated with shift management.
  • Schedule Top Performers at Peak Times: Schedule top-performing employees who can handle increased pressure during peak hours or days. Workforce management software like Legion WFM lets you quickly identify high performers based on past performance metrics.
  • Share Employees Across Locations: If you operate in multiple locations with varying demand patterns, sharing staff across stores helps balance workloads while providing opportunities for cross-training staff in different environments.

Reduce Pay Overages

One key aspect of saving money on labor is to reduce overtime pay, which often creeps up unintentionally due to poor scheduling or lack of awareness.

  • Avoid Unintentional Overtime: Always be aware of each employee’s scheduled hours. Automated scheduling software makes this much easier by creating compliant schedules free of overtime. And if a manager makes an edit that introduces overtime or another compliance violation, they are automatically warned.
  • Accurate Time-Tracking with Automated Tools: Manual time-tracking methods are time-consuming and prone to errors, which can result in overpayments or compliance issues. Automation ensures more accurate tracking and less work for admin.

Reduce Employee Turnover, Increase Productivity

In the retail industry, reducing employee turnover, and increasing productivity are critical to maintaining profitability.

  • Consistent and Flexible Scheduling: Offering consistent and flexible scheduling for your employees will help reduce labor costs significantly. Reduced overtime expenses and improved employee work-life balance lead to lower turnover rates.
  • Pay Flexibility: Give employees flexible pay with options like Legion’s InstantPay product. The ability to pay employees when it’s most convenient for them will give them better financial stability.
  • Better Communication/Feedback: Foster a positive workplace environment where issues are addressed before they become costly, such as increased absenteeism or decreased productivity. You can use special communication tools to help facilitate feedback between the company and employees.

Motivate and Incentivize

Engaged and motivated employees are the backbone of a successful retail business. Encourage engagement with communication, achievable goals, and rewards for outstanding performance.

  • Setting Achievable Goals: Help employees set realistic yet challenging goals so they have something tangible to strive for while also providing a measure of their progress. Regular updates on goal progression keep everyone on the same page and create transparency and trust.
  • Incentives and Bonuses: Incentives such as bonuses, public recognition, or additional PTO can significantly boost employee morale and productivity. Give recognition for hard work and commitment to show employees that their efforts do not go unnoticed.
  • Build trust with transparent, fair, equitable, and quantifiable performance metrics: Give hourly employees feedback on their performance and augment their annual reviews to identify development areas and empower them. Use gamification to engage employees and increase motivation through challenges and rewards.

Lower Your Labor Costs Through Intelligent Automation

Reducing labor costs is a significant challenge for retail companies. Legion’s Workforce Management Software intelligently automates critical WFM tasks and can help you optimize labor costs.

  • Demand Forecasting: With the help of machine learning algorithms in Legion WFM’s platform, you can analyze historical data, local events, and weather to predict future staffing needs. This helps to ensure proper staff allocation and will greatly reduce labor expenses.
  • Labor Optimization: Create the optimal labor plan based on your demand forecast and instantly incorporate it into your automated scheduling.
  • Automated Scheduling and Time Tracking: The Automated Scheduling and Time and Attendance features within Legion’s platform free up valuable time for management and HR teams.
  • Employee Retention Strategies: Improve the employee experience by providing gig-like schedule flexibility through AI-driven automated scheduling, improve employee communication with Frontline Communications, which enables schedule and context-aware communication, provide immediate access to earned wages with Legion InstantPay, and give employees a modern app they’ll love all of which increase frontline engagement.

By investing in Legion WFM, you can enjoy long-term financial benefits. Improved productivity levels through optimized workforce management lead to reduced labor costs and higher employee engagement and customer satisfaction rates.

Learn more about how Legion can help your business optimize labor costs.