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Last Updated on May 27, 2025
Table of Contents
- Introduction
- 10 Proven Strategies To Reduce Labor Costs Without Hurting Productivity
- Final Thoughts: Cut Labor Costs Without Sacrificing Quality
Introduction
Labor is one of the largest operating expenses for most businesses, often accounting for up to 70% of total costs (U.S. Bureau of Labor Statistics). That includes not only wages but also benefits, taxes, insurance, and other employee-related expenses. And these costs are only increasing.
The U.S. wages for hourly workers have increased steadily over the last several years and are predicted to continue on the same trajectory. At the same time, data shows that business owners feel they lack control over their profit margins. When asked how they plan to gain control, they cite curtailing labor costs as their primary method.
While trimming labor costs may seem like it requires drastic measures like layoffs or wage cuts, there are smarter, more sustainable ways to lower expenses while maintaining or even improving productivity.
So, how can you lower labor costs strategically and optimize operations without compromising productivity?
Here are 10 strategic ways to reduce labor costs without sacrificing team performance.
10 Proven Strategies To Reduce Labor Costs Without Hurting Productivity
#1 - Understand Your True Labor Burden Rate
The labor burden rate is the total cost a business pays for an employee. It includes not only wages but also payroll taxes, insurance, benefits, and any other expenses tied to employing someone. For example, a $20/hour employee might really cost $28/hour when all expenses are included.
To calculate the annual labor burden rate for each employee, add their annual salary or hourly wages, any extra compensation such as overtime at work and bonuses, your share of payroll taxes and mandatory insurance for the employee, and your portion of fringe benefits, such as 401(k) match and health insurance contributions.
Understanding your labor burden rate helps uncover hidden overspending and allows you to budget more accurately.
Tip: Know your true labor costs before making staffing decisions. Small changes in benefits or tax obligations can have a big impact.
#2 - Optimize Employee Scheduling
Inefficient schedules lead to overtime, understaffing, or burnout, all of which inflate labor costs.
To help create efficient schedules, consider using a time and labor platform. It will analyze historical data, forecast demand, and create optimized schedules, making it easier to spot and address scheduling gaps.
Struggling with overtime and rising labor costs? Excelforce helps you optimize scheduling, track time accurately, and reduce payroll waste, without burning out your team.
#3 - Reevaluate Employee Perks
Free lunches, travel stipends, or wellness perks can boost morale, but they come at a cost.
Poll your team to understand which perks they actually value. You may find they prefer low-cost options like flexible schedules or remote work over more expensive offerings, like catered lunches or gym memberships.
Consider tying high-cost perks to performance or replacing them with scalable alternatives.
#4 - Revise Your Time-Off Policy
According to a study conducted by Harris Interactive, 54 percent of U.S. adults say they are expected to work while on vacation.
Traditional vacation and sick leave policies can be hard to track and costly to administer.
Consider:
- A single PTO bucket (a paid time off policy that combines all types of paid leave like vacation, sick, and personal time, into a single, flexible "bucket" for employees to use versus separate categories)
- Accrued time off policies to better manage cash flow
- Capping rollovers or setting blackout dates
Some companies have even experimented with unlimited PTO, though it requires a high-trust culture and accountability.
Improve Cross-Departmental Communication
If two departments are duplicating tasks or miscommunicating, you’re wasting labor hours.
Look for inefficiencies in how information flows. Are two people doing the same job? Is marketing taking on sales tasks? Fixing these overlaps can save both time and money.
Use shared tools like project management platforms, calendars, and weekly syncs to streamline coordination.
Leverage Automation And Outsourcing
Manual processes are slow, error-prone, and expensive. Automating tasks like payroll, time tracking, and onboarding can free up hours of administrative time.
Similarly, outsourcing non-core or infrequent tasks (like graphic design, IT, or tax prep) gives you access to expert support without the overhead of hiring full-time staff.
Cutting overtime doesn’t mean cutting performance. Excelforce gives you the tools to improve productivity and save on labor at the same time.
Maximize Current Staff Before Hiring
Hiring is expensive. Before expanding your team, consider using temporary overtime for trusted employees who already know the work.
A “panic hire”, or hiring a poor-fit employee just to fill a gap can lead to high turnover and lower productivity. Overtime, if used strategically, can be a cost-effective short-term solution.
Embrace an Agile Mindset
Agility helps teams adapt to changing needs without chaos.
At its core, the agile philosophy focuses on breaking large goals into small, manageable tasks. Empower teams to make decisions and collaborate across departments. Agile workflows help prevent overstaffing, streamline resource use, and support fast pivots.
Invest In Employee Retention
Replacing an employee costs thousands of dollars in recruitment, onboarding, and training. That’s why retention is key to controlling labor costs.
Implement comprehensive applicant searches and training to ensure people are in the right seats doing the right jobs, and that they’re happy with their managers. In the book First, Break All the Rules, Gallup interviewed a million employees and 80,000 managers and found that job satisfaction was linked, first and foremost, to the employee’s ability as a manager.
Focus on:
- Strong management
- Career growth opportunities
- Recognition and fair pay
- Work-life balance
Additionally, listen to employee feedback and act on it when possible. When your workers feel valued and supported, they’re less likely to leave.
Cross-Train Employees
Cross-training improves team flexibility and allows employees to adapt to unexpected absences or shifting project demands when needed. It also keeps the workday interesting and reduces the risk of burnout.
When someone is out or workload spikes, cross-trained employees can pitch in, minimizing the need for overtime or new hires.
For example, if a team member from customer service can help with basic administrative tasks during a busy week, you can avoid overloading a single department and prevent the need for unnecessary overtime.
Want help reducing your labor costs without hurting productivity?
Final Thoughts: Cut Labor Costs Without Sacrificing Quality
Reducing labor costs is not about cutting corners and eliminating staff. It is also not about ditching commissions or freezing wages. Instead, carefully analyze all the variables directly influencing labor costs and consider restructuring for the sake of efficiency.
This means that when labor costs change (as they do regularly), the business can make accommodations instead of moving into costly crisis mode.
With the right tools and a strategic approach, your business can save money while keeping employees engaged and customers happy.
©2025 - Content on this blog is intended to provide helpful, general information. Because laws and regulations evolve, please consult an HR professional or legal expert for guidance specific to your situation.