Payroll Management | 11 mins read

How Proper Payroll Management Can Counteract Rising Labor Costs

how proper payroll management can counteract rising labor costs
Michelle Jaco

By Michelle Jaco

The Cost of Doing Business

There are many costs to account for when running a business, like accounting for employee expenses. Staffing is a crucial and costly component when it comes to business investment. Broken down into various divisions, the key categories to keep in mind are-

Calculating labor costs and payroll processing is complex and includes several variables. This is especially challenging for a small business, as they typically do not have the bandwidth for full optimization of these processes. These variables include the type of industry, the role of the employee, the location of the company, and the type of benefits the employer is willing to give to his/her employees.

So, how much does hiring a new employee cost? Consider these key variables-

Salaried Worker
Once an employer has decided on a basic salary, the company must then take into consideration taxes and benefits. The real cost of employees is typically 1.25 to 1.4 times the base salary. For example, an employee earning $30,000 will cost an employer roughly between $37,500 and $42,000.

Base salary is mainly decided by the cost of living, and this is why location is an important variable when talking about constructing a base salary.

Hourly Worker
For hourly workers, each employee costs the total amount of his/her gross wages. For both hourly and salaried employees, state payroll taxes, Social Security and Medicaid taxes must be accounted for when finding the true cost.

For example, an employee is paid $15 per hour. If they work 40 hours a week for 52 weeks, they will work 2,080 hours, which makes labor cost equate to $31,200 per year (pre-tax).

Benefits
There are four major types of benefits that many employers offer- medical insurance, life insurance, disability insurance, and retirement plans. As of December 2019, employers spent an average of $10.37 per employee in benefit costs. This is approximately how much employers are spending on employee benefits-

  1. Medical - The Department of Health and Human Services estimates the average annual healthcare premium cost is approximately $5,359 for a single employee per year. That may seem costly but employers typically pay for 50 to 80 percent of the cost of the insurance, leaving the rest to be paid by the employee.
  2. Life - Life insurance is a relatively affordable benefit to offer to employees. Typically life insurance costs around $36 a month per employee. The most common life insurance given to employees is group term life insurance. This is because it's inexpensive and offers tax advantages to employers.
  3. Disability - Disability benefits guarantee a certain amount of income to an employee who is unable to work due to illness or accident. According to the Bureau of Labor Statistics, the average cost of disability would cost an employer $624 each year for a full-time worker.
  4. Retirement - Retirement benefits are funds set aside that provide income at the end of an employee's working career. Employer costs for retirement averages to $1.35 per hour worked.
HR Payroll
A major role of a human resource department is to take over payroll processing, assist with tax filing, set up employee direct deposit, and monitor employees' working hours as it pertains to employee scheduling. The term payroll has several working parts-

  1. The calculation and distribution of paychecks
  2. Financial records for wages, deductions, bonuses, etc.
  3. The total earnings of all employees in a fiscal year
Once employee's pay is calculated, deductions must be made in addition to benefits or any overtime, these deductions could include-
  • Employer share of FICA
  • Federal unemployment tax (FUTA)
  • State unemployment tax
  • Workers' compensation
Many employers hire an outside payroll company who charges a basic package fee that can range from $25 to $200 per month. Payroll software eases the strain of this process and ensures accuracy in time logs and wages paid.

Gaining Visibility into Payroll Costs

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Payroll is considered one of the most important fundamentals for a business. With that being said, it's important that employers become knowledgeable with the payroll system.

Business owners save time and create structure within their business to utilize payroll systems. The structure is key to payroll because businesses must abide to federal, state, and local laws when hiring, offering compensation, and withholding payroll taxes, etc. Having to account for all of these laws call for a streamline payroll system to avoid mistakes and confusion.

Overspending is a common occurrence in many businesses. Over time, over-scheduling, and under scheduling are usually the culprits for higher labor costs and overspending. In order to avoid such occurrences, key identifiers must be pinpointed and addressed.

1. Overtime Hours
Overtime ranks as one of the biggest expenses for most companies. Correct and incorrect management can mean the difference between lawsuits and low morale over time.

Track Employee Time
According to the Bureau of Labor Statistics, an average American worker works 4.4 hours of overtime per week. This totals up to roughly 211 extra hours per year.

In order to avoid hidden overtime pay, many employers use mobile time tracking, this alerts an employer and an employee when overtime is about to be reached.

Mobile tracking also allows management to see if there are certain patterns at the individual employee level. Are there certain employees who are consistently working overtime hours each week?

Communicate Expectations
One of the most effective ways to handle an overtime issue is to improve communication and educate by clearly stating to employees his/her expectations. As an employer, expectations must be clear to all employees in order to avoid any unwanted habits or unlawful practices.

2. Over Scheduling and Under Scheduling
Employee scheduling is a continuous challenge for any workplace. It needs to incorporate business demands, proper communication amongst employees, and flexibility in order to increase business profits while keeping employees loyal and happy.

In order to avoid over or under scheduling, there are a few guideline principles to avoid unnecessary labor costs-

Online employee scheduling software that makes shift planning effortless.
Try it free for 14 days.

Employee Qualifications

To be set up for success, there should be at least one highly experienced and qualified worker to mentor other employees. An ideal mentor should be an employee who has worked with the company the longest and understands how the business runs efficiently.

Account for Low Seasons and Slow Hours

When scheduling employees, be mindful of slow seasons and times of the day. This will ensure guest satisfaction and productive employee. For example, understaffing can cause a loss of customers, while overstaffing will create unnecessary expenses and a loss of productivity due to employees not having enough to do.

Vacations, Holidays, and Time Off

Employers should have policies in place to prevent any last-minute time off requests from employees. When creating a time-off policy it should include parameters of advanced notice, blackout dates during peak season or busy holidays, and no overlapping requests. In doing so, management can account for each worker's request and find suitable coverage to avoid being understaffed.

Online employee scheduling software that makes shift planning effortless.
Try it free for 14 days.

Employee Preferences

Many workers have different preferences due to personal obligations. This can include school, parenting, or medical emergencies. Making sure employees are accounted for will reduce absenteeism and low morale amongst the staff.

Prepare a list of workers who are available at a moment's notice. So when a worker is unable to show another employee can quickly be called in to cover.

Not Posting the Schedule Last-Minute

If possible, management should post schedules a month in advance. This way employees can plan accordingly for shift swaps or any covers they may need. This, in turn, avoids no shows or any errors in the workplace.

How to Increase Efficiency and Improve Your Bottom Line

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Workplace deficiencies are a result of limitations in the workplace. In order to improve efficiency and a business's bottom line, employers need to first identify the deficiencies to then implement changes. Common deficiencies in the workplace include-

  1. Missed deadlines
  2. Errors due to poor judgment
  3. Complaints of being treated unfairly in the workplace
  4. Repeated absences or excessive sick days
  5. Repeated errors despite increased guidance
  6. Unexplained poor work performance
  7. High employee turnover
After identifying deficiencies employers can then implement these changes-

Determine Time and Attendance Solutions
Accurately tracking time and attendance is important for all companies. In order to maintain accuracy, many businesses have turned to time and attendance software to lessen absenteeism.

Gain Insight by Measuring Productivity
Start with valuing the quality of work as much as the quantity and lessen policies that can cause employee morale to decrease. Use productivity-measuring tools to monitor and manage a team that's easy to use.

Improve Quality of Work by Tracking Employee Morale
A happy, engaged employee will work harder for his/her employer. Employees who dislike their job or don't feel appreciated results in a high employee turnover rate and low morale.

Creating open communication and respect driven work environment will result in better employee productivity.

Increase Employee Satisfaction by Offering Benefits
Besides medical insurance, many companies have been giving perks such as free ski passes, or discounts on monthly cell phone bills and gym passes. Giving things to employees that can enrich their lives can result in higher productivity.

Reduces Costs
If a workplace is suffering from inaccurate time recording, absenteeism, buddy punching all of these things become costly and this can impact your bottom line. Using automated software helps accurately capture all attendance information, and eliminates time theft.

Integrated Solutions that Merge Timekeeping with Payroll

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Processing payroll seems like a simple mathematical task that any business can successfully achieve. However, after adding benefits and tax deductions to every employee paycheck can become overwhelming. The most common payroll system deficiencies include-

  • No one reviews and approves recorded time
  • No surprise audits of payroll
  • No comparison between payroll expenses to a budget
  • Appropriate procedures for adding/removing employees are not in place
By being payroll efficient-

Enhance Employee Experience with Accuracy
Delivering accurate paychecks is crucial to maintaining a positive work experience. Fifty-four percent of Americans have had a paycheck problem while salaried or hourly. Management may have a strong and positive relationship with its employees but if a monetary mistake is made, employers may lose trust with their staff.

Freeing Up Time and Additional Costs
Many organizations rely on payroll administrators or outside payroll services to complete payroll. With integrated timekeeping and payroll, the system creates efficiency in the process and allows employees to focus on other projects the organization may need to finish.

How to Calculate Labor Costs

One of the biggest costs of doing business is labor. Labor costs can account for as much as 70 percent of total business costs.

In order to avoid higher than expected labor costs, it's imperative that employers accurately calculate costs of labor or utilize a management payroll system to determine the cost.


If determining this manually, the formula is as follows-


1. Calculate Gross Pay
For example, if a full-time employee works a 40-hour workweek in one year (52 weeks) with a pay rate of $10 per hour, the gross pay is calculated by-

To determine gross pay- Gross Pay = Pay Rate x Gross Hours
Ex- Gross Pay = $10/hour x 2,080 hours, so Gross Pay = $20,800

2. Calculate Hours Not Worked and Net Hours Worked
Employers won't have an exact number or foresee when an employee will be absent. Therefore in order to take an educated rough guess employers look at past records from other employees and find the average of the absentee numbers to apply to a new employee.

Let's say the average is 14 days lost because of vacations or illness.

Hours Not Worked= 14 days x 8 hours, therefore the hours not worked would be 112.

Now subtract hours not worked from the total hours worked from step 1.

Net Hours Worked = Gross Hours - Hours Not Worked
Net Hours Worked = 2,080 - 112, so the Net Hours Worked = 1,968

3. Add Additional Annual Costs
The cost of labor includes expenses other than income. Other annual costs include insurance, taxes, overtime, benefits, etc. Be sure to account for all additional costs to get an accurate calculation.

This total is the direct labor cost and shows how much employers are actually paying an employee to work each year.

Annual Payroll Labor Cost = Gross Pay + Other Costs

4. Calculate Labor Costs by Hour

Employers know their employee's base rate pay, but they need to know the actual hourly cost of labor.

Actual Hourly Labor Cost = Annual Payroll Labor Cost / Net Hours Worked

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