Top tips for reducing employee costs

Updated: 23rd November 2021

Are Your Employee Costs Too High?

Most employers tend to look at employee costs once or twice a year – usually when they review their annual accounts or when they perform employee appraisals. However, if your business pays overtime rates, bonuses, shift-work rates or variable rates then employee costs should be controlled and reviewed on a regular basis.

Before you employ an employee, you should research to find out how much that role earns as an industry average. If you pay too little you will not attract the best employees, but if you pay too much you set a precedent that cannot be easily changed and you’ll significantly overpay on the wage bill. It’s important to have the right employees in your business, but it’s just as important to make sure you’re paying them the right wage.

If an employee is underpaid they will look for alternative employment, productivity will be low and they will have little loyalty to your business. If an employee is overpaid they will not risk leaving your business (which could be both a positive and negative issue!), they will become complacent in their role and they may see you as an ‘easy target’.

It’s important to make sure you comply with employment law and pay at least the National Minimum Wage (NMW). The NMW normally changes every year (usually in October) so if you have employees who are on NMW you should check the rates regularly to ensure you’re compliant -

If you have employees who are paid varied amounts (due to overtime, bonuses etc.) you should ensure you keep full and accurate records of the hours worked. Many employers use timesheets, however we would recommend installing an electronic clocking system if you have employees who are paid based on the amount of hours worked (rather than a fixed salary). Fingerprint scanning clocking systems are ideal as it ensures employees can only clock themselves in and out (and not each other).

Keeping a tight control of hours worked can save a significant portion of the wage cost, for example if an employee who earns £10 per hour states they worked 9.5 hours per day (but they actually worked 9.25 hours per day) this equates to an extra £12.50 per week – which is £650 per year. If 10 employees did the same, it would equate to £6,500 per year so you can see how quickly the extra costs mount up! Part of controlling hours is also making sure employees do not take extra breaks, or do not ‘extend’ their normal break times (e.g. a 15 minute break becomes 20 minutes and so on).

Don’t give employees an excuse not to work! In order to keep productivity levels high, ensure your employees have all the right equipment they need (and that the equipment is in good working order). Most excuses that employees use for low productivity blame lack of equipment or equipment not working, e.g. “I couldn’t process the order because the computer kept crashing” or “I was standing waiting for the crane to be free a few times today before I could carry on with the job”.

If your employees have to work overtime, do you charge customers extra? If not then you should look at quoting longer times to customers so the job can be completed in normal working hours. Overtime is an expensive habit to get into. If you’re able to charge the overtime rates back to the customer through increased pricing then at least you’re not absorbing the extra cost in your business. But if you can’t charge higher prices to customers then don’t authorise the overtime!

Here’s a summary checklist for keeping employee costs low:

  • Aim to pay employees no less than the industry average wage. Overall this will help you to keep costs down by securing good employees who are productive and loyal.
  • If you want to pay high wages to employ ‘top talent’ make sure the employees know they are expected to perform higher than average. It’s vital to have performance management measures in place for this type of employment strategy.

  • Keep very tight controls of hours worked, especially if the employees are paid by the hour. If you find it difficult to keep track of what hours your employees work, look at implementing an electronic clocking system.

  • Ensure your employees have the right equipment (in good working order) to allow them to do their jobs effectively and efficiently. If your production levels are low, problems with equipment can be a significant cause.

  • Keep overtime levels to a minimum and always charge the cost of overtime within the sale price to the customer.

It’s always important to remember that if the employee feels valued and is treated well then they will repay that with high productivity levels, effective working and loyalty to the business. It’s difficult to quantify the effect this has, but overall it will help to keep employee costs down. Our extensive office network comprises 100 offices across the UK with a partner-led service offering immediate director advice and support.

Liz Strama

CEO, HR Protected

0800 644 6080
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