How to Reduce Labor Costs: 9 Tips

Businesses are feeling more pressure than ever to tighten their belts amid high inflation and soaring costs across their supply chains. Since labor represents one of the largest expenditures for any company, business owners and managers are trying to adapt to the pressure by being more cost-efficient with their labor costs.

Labor costs are the total amount a business spends on its employees. This includes salaries, wages, benefits, bonuses, payroll taxes, and even indirect expenses like recruitment, training, and equipment.

By breaking down and optimizing cost management, you can protect your bottom line without compromising your team or productivity. Read on for nine tips on how to reduce labor costs and gain control over your profit margins.

1. Reduce costs by forecasting labor demand

Have you ever found your business overstaffed during the quiet hours — and been stressed about how much you’re spending on labor when sales are slow? You’re not alone.

This challenge is common for many managers, particularly in the restaurant and retail industries. Either your business schedules too many employees during hours that don’t see enough sales, or you don’t schedule enough staff to support spikes in customer traffic. Both scenarios can hurt your business — by reducing your profit margins or hurting the customer experience (and future sales).

Forecast labor demand to avoid overstaffing and understaffing. This is the secret sauce for reducing labor costs while delivering a great customer experience. Labor demand forecasting software predicts how many staff you’ll need at any given time to match customer demand. This enables managers to adjust their employee schedules up or down to match demand and avoid spending budget on any unnecessary labor hours. Forecasting labor demand also ensures you’ll have enough employees on hand during rush hours, reducing strain on your team.
Control costs using clear budgets and scheduling guardrails. Once you know the optimal staffing levels for your business, you need to enforce them. Provide your managers with clear targets for weekly hour or wage budgets and make them easy to follow. Consider using modern scheduling software that shows your budget, required staff levels, and how you’re tracking against your plan while scheduling. A visual guide of how your schedule compares to your targets can be a game-changer for staying under budget.
Make decisions on the go. As they say, time is money. Instead of spending hours glued to your computer making staffing decisions, use a mobile app to schedule and make changes from anywhere.

2. Reduce pay overages

It’s 11:00 a.m. Your retail store is bustling. You thought you had enough staff to cover the registers, but now you see that customers on the floor need extra assistance. It’s almost time for a shift change, and one employee asks if you need extra help. You say yes without thinking.

But hindsight is 20/20. Later, you’ll look over the numbers and realize that you have to pay a high overtime fee for the weekend. On top of that, the employee didn’t have enough time to rest between shifts, so you’ll also need to pay an additional penalty in certain jurisdictions.

The easiest way to reduce labor costs is to cut some of these avoidable pay overages. Here are three tips to make it easier:

Use stress profiles to alert overtime. While stress profiles might make you think of someone’s emotional state, in this case, stress profiles refer to an employee’s schedule. Use automated tools that trigger a warning if an employee is nearing the max number of hours in a week so you don’t accidentally assign overtime hours to the wrong person.
Ensure appropriate rest time between shifts. Some regulations, like Fair Workweek, require employers to provide an appropriate amount of time between shifts. Get it wrong, and you might have to pay a fine. Make compliance easier with a workforce management system that recognizes the requirement for rest between shifts and avoids scheduling anyone in a way that will trigger a penalty.
Confidently record accurate timesheets. Using old-school paper timesheets makes it easy for mistakes to slip through and costly payroll errors to affect your bottom line. Time tracking tools with built-in geo-location, timestamping, and record-keeping can help ensure you always have the right hours tracked.

3. Provide employees with predictable work schedules

Employers in Fair Workweek jurisdictions have already discovered the cost savings and other benefits of providing shift workers with fair and predictable schedules. Fair Workweek laws, which have cropped up all around the United States, require two weeks of advance notice for work schedules, no clopening shifts, and premium pay if an employee’s schedule is changed after being posted. Although compliance with Fair Workweek can be complicated, tools can help automate much of the work.

Even if you’re not located in a Fair Workweek jurisdiction, implementing similar practices in your workplace can reduce employee stress, increase employee morale, and result in labor cost savings. Employees can plan transportation and childcare, which helps reduce no-show shifts. Here are three tips to implement Fair Workweek principles into your scheduling practices:

Give advance notice. Post employee schedules at least two weeks in advance and publish them electronically.
Provide ample rest time. Don't schedule employees for back-to-back closing and opening shifts without at least 10 hours off between shifts.
Reduce schedule changes. After the schedule is posted, limit schedule changes to emergency situations only. Employees should be able to rely on their posted schedule.

Find out how much time and money you could save by using Deputy’s free Scheduling ROI Calculator.

4. Reduce employee turnover and increase productivity

It costs far more to replace an employee than to retain great staff. So, take the time to invest in keeping your employees happy. Whether you manage a craft brewery or a large franchise, your focus should be on delivering quality products and providing top-notch service. But to do that, you need to attract quality talent, retain your best workers, and use emerging technology to empower a smarter workforce.

According to a survey of more than 1,400 shift workers, 69% of employees are worried about job security. Here are three tips to help your team feel more secure in their roles and reduce the chances of unwanted employee turnover:

Empower your team. Enable employees to swap shifts to avoid last-minute no-shows.
Give your staff a seat at the table. According to a recent survey, 90% of shift workers believe they contribute to their organization’s success. But employees can quickly disengage when they feel their organization’s decision-making lacks transparency. Use a communication app — and turn on read receipts — so you have a clear record.
Make wellness a priority. Encouraging employee wellness can pay dividends to your company. Happy employees lead to happy customers — and lower employee turnover.

5. Incentivize performance

Bonuses and commission payments are a great way to incentivize employees to perform at their best. Bonus plans should be based on measurable performance metrics. Likewise, commission plans should reward employees for meeting key sales metrics. When employees are more productive, sales will likely increase, leading to higher profit margins and better employee morale — who doesn’t love the opportunity to earn more money?

Align bonuses with clear outcomes. Review bonus plans to make sure they incentivize performance in measurable ways.
Make goals a priority. Review commission plans to ensure that sales metrics and commission payouts are up to date and aligned with your sales goals.
Communicate often. Communicate performance goals to managers and staff to make sure everyone is on the same page about what is required and what the incentives are.

6. Cross-train employees

Cross-training your employees is one of the most effective ways to reduce labor costs without cutting headcount. By training team members to perform multiple roles, you can create a flexible workforce that adapts to fluctuating demands. Employees can fill in for absences, cover unexpected demand, and reduce the need for temporary workers or overtime, all while fostering collaboration and boosting job satisfaction.

Tips for successful cross-training:

Identify critical roles and skills within your team that would benefit from cross-training.
Pair employees with experienced mentors for hands-on learning.
Periodically rotate employees into different roles to build their confidence and skills.
Use downtime or slower periods for training to avoid disruption to your operations.
Recognize and reward employees for embracing new responsibilities.

By investing in cross-training, you reduce labor costs while creating a more dynamic and resilient team that’s better prepared to handle the challenges of a changing business environment.

Because you are giving your employees new responsibilities, give them raises when you can. Higher pay to your existing employees can still be less expensive than hiring new team members.

7. Invest in automation

How much time and money are you wasting on manual processes? Automating repetitive and time-consuming tasks is one of the most effective ways to reduce labor costs and cut unnecessary expenses. By introducing tools like scheduling software, time-tracking systems, and project management platforms, businesses can eliminate manual processes that can lead to errors and inefficiencies.

Automation can streamline workflows, decrease the time it takes to complete labor-intensive tasks, and improve overall productivity. Many retailers have moved to AI and automation for:

Inventory management. Reduce manual data entry and ensure optimal stock levels.
Labor demand forecasting. Predict staffing needs to align with peak and off-peak periods.
Employee scheduling. Automate shift planning to save time and reduce errors.
Compliance management. Simplify adherence to labor laws, thus minimizing risk.
Pricing management. Adjust pricing dynamically based on market trends and customer behavior.

By using automation to reduce labor costs, you and your employees can focus on more value-added activities while reducing the time spent on administrative tasks. Find out how Ace Hardware and Juice Press are successfully saving money with Deputy’s cost-saving automation capabilities.

8. Encourage employee feedback

Involving employees in decision-making can provide new ideas about how to reduce labor costs while improving workplace efficiency. Workers often have unique insights into daily operations and can identify areas in which to optimize workflows, adjust processes, or reduce unnecessary expenses. Encouraging feedback fosters a sense of ownership and collaboration, leading to cost-effective solutions that managers might not have considered.

How employee feedback can reduce labor costs:

Identify cost-saving opportunities. Employees may spot waste or inefficiencies in tools, processes, or resource use.
Optimize staffing. Feedback on task assignments and workloads can help ensure labor is distributed efficiently.
Increase morale and retention. When employees feel heard, they’re more likely to stay, reducing turnover and associated recruitment costs.

Gather input through one-on-one check-ins, suggestion boxes, and anonymous surveys. A great workplace thrives on transparent communication and employees feeling heard. Acting on employee feedback doesn’t just cut costs — it also builds a culture of collaboration and innovation.

9. Consider outsourcing non-core tasks and offshoring

Outsourcing non-core tasks and exploring offshoring options can significantly reduce labor costs while allowing your team to focus on strategic priorities. Businesses save on wages, training, and overhead expenses by delegating repetitive or specialized tasks to external vendors or remote teams while gaining access to specialized expertise. This approach also increases flexibility, enabling companies to scale labor needs up or down as workloads change.

Offshoring, in particular, allows companies to tap into global talent pools in places where labor costs are lower, ensuring high-quality work at a fraction of the expense. Commonly outsourced tasks include IT support, payroll processing, customer service, and data entry.

Tips for outsourcing and offshoring effectively:

Vet vendors carefully. Research potential outsourcing partners to ensure they meet your quality and compliance standards.
Establish clear expectations. Set specific goals, deadlines, and performance metrics to measure success.
Maintain strong communication. Use collaborative tools and regular check-ins to ensure alignment and prevent misunderstandings.
Start small. Begin with a pilot project to evaluate the effectiveness of outsourcing or offshoring before scaling.
Monitor performance. Regularly assess the quality of work and provide feedback to ensure consistent improvement.

Reduce labor costs and increase productivity

Whether you manage a retail store or a large franchise of restaurants, you’re focused on delivering an outstanding customer experience, making sales, and ensuring the long-term success of your business.

To do that, you need the right tools in place to track labor costs, optimize staffing to match demand, and empower your team to perform at their absolute best.

Sign up for a demo of Deputy to learn how you can control labor costs, increase your margins, and create a better employee experience.

9 Tips on How to Reduce Labor Costs