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The Biggest Cost of Doing Business: A Closer Look at Labor Costs
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Workforce Management

The Biggest Cost of Doing Business: A Closer Look at Labor Costs

As any company leader knows, one of the biggest costs of doing business is labor. Labor, which can account for as much as 70% of total business costs, include employee wages, benefits, payroll and other related taxes. Yet, according to a Paycor survey, HR professionals only spend 15% of their time managing the cost of labor. Especially these days, attracting top talent, engaging employees and developing them over the course of their careers are always subjects close to the hearts of most HR professionals. But herein lies the ideal opportunity for HR to step out of its comfort zone and contribute much-needed value to an area that has historically been owned by finance.

The cost of employee benefits, which can account for up to 30% of overall labor costs, is a significant expense as well. In Paycor’s State of the American Business survey, 65% of companies said they planned to reevaluate their benefits package in 2021. Conversations around the cost of benefits are another opportunity for HR leaders to make their voices heard.

Operating with Fewer Resources and Smaller Budgets

In the face of rising costs and an ongoing struggle to find employees, it’s understandable that companies are considering all manner of ways to reduce their labor spending and total benefits costs. Many organizations are feeling the pressure to do even more with less—fewer employees, fewer resources and smaller budgets. So, what can you do to confront the labor cost issue head-on and find solutions?

Gain better visibility into payroll costs

As the saying goes, “Know your enemy.” Understanding the root of the problem is the way forward to finding a solution. Having an accurate picture of your labor costs gives you the data you need to identify trends and pinpoint the issues. Start by asking questions such as: Are we overspending on labor? Are we underutilizing our workforce? Are we effectively managing overtime? Do we have the right people scheduled at the right times? Are we operating above the average labor cost for our industry?

If your overtime costs have been unusually high lately, uncovering the root cause will depend on having accurate payroll data analytics that are easily accessible. From there, you can identify trends and insights into when the most overtime hours were being logged, which departments or employees were working overtime, and whether a similar peak occurred in the past. Armed with the right data, you can create a strategy to correct the problem and more easily predict when you might need additional staff in the future, which will enable better budget forecasting. Having this access to labor information allows you to plan for the future and help your organization make more informed decisions.

When you have a clear understanding of employee compensation and benefits costs, you can plan better for annual wage increases and additional headcount as your company grows.

Answers to your C-suite’s most pressing questions about employee labor

Your company leadership wants to not only uncover gaps, but also have a plan in place to correct and manage them. Can you predict who’s at risk for resigning? Which managers seem to have an departmental revolving door? Which locations are experiencing the most turnover? Paycor Analytics can help you answer the questions you have about your workforce by digging into and transforming complex data into clear, direct answers.

Labor costs are rising; counteract with workplace efficiencies

Once you have a solid understanding of your current labor costs and trends, you’ll probably be looking for ways to reduce your spend. Here are a few ways to help increase overall efficiency and make a positive impact on the bottom line:

  • Implement a time and attendance solution to ensure employees are clocking in and out correctly. You can reduce time theft, more easily manage overtime expenses, and mitigate compliance risk.
  • Select a unified solution for HR, payroll and timekeeping to increase process efficiency and provide accurate and complete labor data to your stakeholders.
  • Find the right HR solution to streamline administrative processes and free up time for value-added tasks, helping ensure that labor is worth the cost.
  • Automate benefits administration so you can help guide employees through benefits selections and identify the packages and plans most attractive to your workforce. Armed with this data you can help ensure that you’re not wasting resources and money on plans employees are not interested in.

Labor costs are rising, and business leaders are on the lookout for any area of the business where they can reduce spending. Having the right technology in place can give HR the visibility into key labor metrics and help you maximize efficiency, enabling your business to achieve its goals. Plus, taking on greater responsibility in helping to manage and forecast labor costs and collaborating with finance will help you be seen as a strategic leader within the organization.

What Is Labor Cost?

The overall labor cost definition is when a company’s total labor cost is broken down into direct and indirect expenses. Direct labor cost includes hourly wages, employee benefits and all payroll taxes paid by the employer for employees involved in the actual production of goods or performing services. Indirect labor cost refers to employees who are not actively involved in the service or production process. These roles include marketing, accounting, and human resources.

Labor cost percentage formula

The formula for how to calculate labor cost is pretty straightforward. To find your labor cost percentage, divide your labor cost by gross sales and multiply by 100.

Labor Cost Percentage = (Total Labor Cost / Total Gross Sales) x 100

Be sure to include the cost of all bonuses, commissions, benefits and all taxes you pay. For example: If your labor costs total $250,000 and gross sales equal $500,000, the labor cost formula would look like this: 250,000 ÷ 500,000 x 100 = 50%.

Labor cost as a percentage by industry

In 2020 the largest increase in year-over-year labor cost was in the air transportation industry at nearly 107%. This table shows industries’ labor costs from 2019 to 2020 as reported by the Bureau of Labor Statistics.

Industry% increase over 2019
Air transportation106.9
Amusement Parks & Arcades76.4
Travel Arrangement & Reservation Services73.7
Warehousing & Storage15.0
Engineering Services11.8
Periodical Publishers11.1
Newspaper Publishers8.2
Couriers & Messengers7.3
Automotive Repair & Maintenance6.5
Commercial Banking5.1
Natural Gas Distribution5.0
Wired Telecommunications Carriers4.6
Water, Sewage & Other Systems4.5
Software Publishers2.9
Power Generation & Supply2.6
General Freight Trucking, Long-Haul1.7
Specialized Freight Trucking1.6
Restaurants1.1
Drycleaning & Laundry Services1.0
Postal Service0.6
Accounting & Bookkeeping Services0.1
General Freight Trucking, Local-1.2
Wireless Telecommunications Carriers-2.9
Truck, Trailer, RV Rental-4.1
Cable & Other Subscription Programming-4.9
Gambling Industries-8.1
Medical & Diagnostic Laboratories-10.5
Radio & Television Broadcasting-11.7
Line-haul Railroads-13.5

How to lower labor cost in a restaurant

Labor costs are typically the second highest cost—behind food and beverage—for restaurant owners and operators. Using scheduling software can help ensure you have a high staffing load only when you need it based on projected sales volume. It can also help eliminate costly overtime. Competition for good staff is fierce these days, so keeping the employees you already have will help reduce hiring and training costs as well.

What is fixed vs. variable labor cost?

Salaries paid to your workforce are a fixed cost as they don’t change based on production. Overtime, temporary staffing, commissions and bonuses are all considered variable labor costs since they will change depending on many different factors. Variable cost is often hard to predict, but it’s an important component of determining your company’s annual labor cost. 

What’s driving labor cost increases?

Labor costs are rising across the board in all industries for several reasons. Minimum wage has increased in several states, and hourly pay for workers has increased by nearly 5% over the past year (Bureau of Labor Statistics). People have left the workforce en masse, driving unemployment rates to historic lows and giving job candidates the upper hand in negotiating higher salaries.

About Paycor

More than 30,000 medium-sized and small businesses trust Paycor to help them manage their most valuable assets—their people. Paycor is known for delivering modern, intuitive recruiting, reporting & analytics, HR and payroll software, but what distinguishes us is our singular focus on helping business leaders, entrepreneurs and HR professionals make a real difference in their organizations. Contact our team today to learn how we can help you make an impact in your organization.