As a recession looms, companies should be thinking about ways to reduce their overhead. There may be no need to take action now, but being prepared to act when necessary is a good strategy. A big cost to companies is payroll, but cuts aren’t easy to do. Employers don’t want to let employees go, although some may be forced to do this. The good news is that there are some ways to reduce payroll costs without downsizing your staff. Yes, these actions may not be welcome, but can help a company get through a recession.
Ways to cut payroll costs
Limit or bar overtime
Overtime pay is costly—time and a-half to employees who are not exempt from the Fair Labor Standards Act overtime rules, plus the employment taxes related to it. Some employees love overtime because of the boost to their paycheck, but companies may need to curtail overtime for fiscal reasons. Think of ways to get work done without the need for overtime. Some ideas:
- Impose overtime restrictions. Simply set limits on whether or how much overtime is allowed. Communicate these restrictions to your staff.
- Use technology. Where possible, let a machine to it. Obviously, this may require an investment upfront to obtain the machine or software needed to do the job. In the long run, it will save on payroll costs.
- Analyze how workers are working. Data can show whether employees are working efficiently and whether changes in scheduling, procedures, or teams, etc. are needed.
Reduce or suspend retirement plan contributions
Employees come to expect employer contributions to retirement plans if they have been made in the past. If the company is hit hard and is forced to reign in spending, reducing or suspending employer contributions may be necessary. The rules for employer contributions on behalf of employees depend on the type of plan. If a company has:
- A profit-sharing plan. Contributions do not have to be made until profits are determined; no profits, no contributions. The deadline for completing contributions is the extended due date of the employer’s return.
- A 401(k) plan to which safe harbor contributions are made. Contributions can be reduced or suspended only if the company is operating at an economic loss for the year or the plan’s safe harbor notice allows for a reduction or suspension of safe harbor contributions 30 days after notice is given to employees (“supplemental notice”).
Limit raises and bonuses
As employee reviews occur throughout the year, cap wage and salary increases to the extent necessary. Keep the rate of inflation in mind when you do. Employees want to keep pace with this rate, but this may not always be possible.
When times are good, companies become generous in giving things away to employees…tickets to sporting events or the theater, personal use of company vehicles (with the employer covering the employee’s tax cost for the benefit), company parties and picnics to name a few. These extras over the course of a year can add up to significant dollars that the company can save by eliminating them. It may be possible to continue offering some freebies, or just looking for lower-cost alternatives.
If you still do payroll manually in-house and issue paper checks to employees, you may be wasting money. Automating this process with the appropriate software and doing direct deposit of employees’ paychecks can be cost savers.
Two things are incontrovertible: employees are your most important asset and you hope the recession doesn’t hit you hard. With that said, you may experience mild or severe reductions in revenue, which in turn may leave you no choice but to curtail payroll costs. Do so in an equitable manner, so management as well as hourly workers are impacted. Communicate the reasons for your actions. You don’t want to lose valued employees and need to fill positions when the recession wanes. (Read more about ways to survive a recession here.)