53 ways to reduce staff costs
How to reduce personnel costs
The situation in the spring-summer of 2020 made the topic of reducing personnel costs relevant, while in the new edition of this review, the first places in the list were taken by those methods that, in my opinion, are most effective in the event of a force majeure work stoppage enterprises and uncertainties about the prospects and timing of the resumption of work. Each of these methods has pros, cons, and limitations associated with both legislative restrictions and the specifics of human resources management in various industries and the willingness of specialists and managers to take tough and unpopular measures, the consequences of which are a possible decrease in employee income. Not all the listed methods of reducing personnel costs apply to your company, but there are many of them, I hope you will choose the appropriate one.
Granting annual leave on non-working days
Paradoxically, in the current situation for an employer, this is not the worst way to save money. Regardless of whether employees will keep their jobs at the end of the pandemic, the employer will be required to pay vacation pay, so it is more profitable to send employees on leave on non-working holidays than to pay wages for the unworked time. Such a decision can also be beneficial for employees – after all, the amount of vacation pay is calculated based on average earnings, while shortly not all employers will be able to keep their wages in full.
Granting unpaid leave
Granting unpaid leave requires a written application from the employee. Reasons for persuading an employee to take unpaid leave can range from promises of compensation to less attractive alternatives outlined in this article.
Working part-time or part-time
If the employee himself wants to go to work part-time or part-time, then an additional agreement to the employment contract is concluded with him. If there is a risk of mass layoffs, the employer can introduce a part-time (shift) and (or) part-time work regime for up to six months 81 clause 2 of the Labor Code. Of course, the employer cannot influence the will of the employee, but considering the prospect of other solutions during negotiations often allows reaching an acceptable agreement.
Downtime through the fault of the employer is paid in the amount of at least two-thirds of the employee’s average wage. Downtime for reasons beyond the control of the employer and the employee is paid in the amount of at least two-thirds of the tariff rate, salary (official salary), calculated in proportion to the downtime. Downtime due to the fault of the employee is not paid. As you can see, that is the reason that directly affects the size of payments. There is a lot of judicial practice and explanations on this topic. The already mentioned case How to fire 400 employees in 3 months also describes the application of this saving method. This method was inapplicable to employees of those enterprises that were subject to the decree on the announcement of non-working days in April – one cannot declare idle time after working hours. Employees whose enterprises were not subject to the decree could be simple – it is up to the employer to justify the downtime.
Payment of a variable part of wages subject to the achievement of certain results of the enterprise following the local regulations of the employer
The Regulation on remuneration may include the following phrase “Bonuses to the Company’s employees are charged only if a separate division or the Company as a whole must fulfill production plans following Appendix 3 to this Regulation. If the Company has not fulfilled the production plan for a month, the General Director has the right, as an exception, to decide on the accrual of bonuses to individual employees or employees of individual divisions of the Company. This decision is formalized by an order for the Company and communicated to the heads of divisions.” If the enterprise has fulfilled the production plan – bonuses are paid, if it has not fulfilled – there are no grounds for bonuses. Payment of premiums is provided but the remuneration system can only be changed per Art. 74 of the Labor Code.
Transfer to remote work
Of course, setting tasks, monitoring, and managing remote personnel make high demands on the company’s management. Remote work allows you to save on the equipment of workplaces and the number of wages, also, a remote employee does not spend money on travel and food in the office, so it will be cheaper. Another argument in favor of remote employees is the ability to hire job seekers who, for various reasons, are not satisfied with full-time work. The ability not to waste time traveling to and from the office is also a plus for telecommuting for those who can work from home. But if the transfer of an employee from “normal” to telecommuting is a necessary measure, it is necessary to soberly assess the ability to perform the same amount of work that the employee did in the normal mode. If it has decreased, there is a reason to discuss and, possibly, revise the terms of the employment contract.
Changing the terms of the employment contract on the initiative of the employer, except changing the labor function
I would call it, rather, not a method, but a general approach to reducing personnel costs, which allows you to use many of the methods listed in this article to reduce costs. Labor Code gives the employer the right to change the terms of the employment contract, except the labor function, unilaterally. “In the case when, for reasons related to changes in the organizational or technological conditions of work (changes in technology and production technology, structural reorganization of production, other reasons), the terms of the labor contract determined by the parties cannot be saved, they can be changed at the initiative of the employer, for excluding changes in the employee’s labor function”. In other words, if the employer and the employee cannot agree, or the employer does not consider it necessary to negotiate with the employee, he notifies the employee about the upcoming changes 2 months in advance, after which the employee either signs an additional agreement to the employment contract with new conditions or, in case of refusal from continuing to work on new conditions, is subject to dismissal with payment of two-week severance pay. Important elements of the procedure are the impossibility of maintaining the previous conditions of the employment contract, changing the organizational or technological working conditions, and the employer’s fulfillment of the obligation to offer an employee who is not ready to continue working in the new conditions, vacancies that the employee is allowed to fill with his existing qualifications. Many of the ways to reduce personnel costs listed in this article, which can be applied by agreement with employees, as an alternative way can be based on the application of Art. 74 of the Labor Code.
Increasing the variable part of wages
The time-based wage system leaves no room for wage fund management. A change in the remuneration system is permissible only in the event of a change in the organizational or technological working conditions. You will be able to justify the need for changes in the wage system by organizational or technological innovations – then two months after the workers are notified, they will come into force. For those who do not sign an additional agreement and do not agree with the new terms of payment, pay severance pay in the amount of two weeks’ average earnings. At the same time, the employer is obliged to offer other vacancies available to him who disagree with the new working conditions. I already described a case about a radical change in the system and the size of wages.
Limiting and controlling the validity period of allowances and surcharges
Article 151 of the Labor Code. This method allows you to reasonably increase the number of wages for the period of expanding service areas, increasing the volume of work or performing the duties of a temporarily absent employee without being released from work, and, accordingly, reducing it in the absence of grounds for additional payments. When issuing orders and preparing supplementary agreements to employment contracts, it makes sense to indicate the validity period of additional payments and allowances.
Ban on hiring new employees
If the tasks of the department can be solved with fewer staff, there is no need to fill all vacancies. Perhaps your employees will cope with the work without additional payment, perhaps you will periodically pay overtime or pay additional employees when reassigning responsibilities. If you do not have the opportunity to accurately calculate the official composition and the number of employees in a department, no one bothers you to use this method.
Reducing the number of employees employed in the production process
For a two-handed saw or a stretcher, two are needed, one can handle a wheelbarrow or a chainsaw. The logic behind this method is to optimize the production process so that fewer employees are involved. At the same time, it is imperative to calculate all the side effects of “reforms” – it may turn out that fewer employees will cost you more. Case study – the purchase of an automated production line reduced the number of unskilled personnel, but the salaries of skilled fitters and the cost of training them with the equipment manufacturer negated the expected savings.
Identification of losses of working time and “extra” workers
This problem is solved using the methods of photography of the working day, allowing to identify the loss of working time and/or calculators for calculating the number of employees, allowing to calculate the workload of employees. If you add up the unproductive waste of working time, it may turn out that some of the employees are not busy with work.
Using wage systems that take into account indicators of quality and quantity of work performed
It is hardly worth paying a forfeit for untimely work done, bearing the costs of re-manufacturing products that turned out to be defective, and at the same time paying wages, the amount of which does not depend on the quantity and quality of work performed. We are not talking about shifting entrepreneurial risks onto employees – the number of wages can and should depend on the result of work. If it is unsatisfactory, the size of wages should be reduced, motivating the employee to “correct production behavior”. The solution is to develop and implement an effective remuneration system.
Increasing labor productivity
If employees manage to produce more products/serve more customers during their working hours, their number can be reduced. Optimization of the production process and the use of perfect technology or work organization – these measures can reduce the number of employees and, accordingly, the payroll.
Redistribution of functions
The simplest example from practice is the reduction of the position of a “pedestrian” courier and the transfer of the functions of delivery of documents to drivers of the transport service. As a result, quality and speed have increased, costs have decreased.
It is more profitable for a medical center to hire a general practitioner with certificates confirming his right to work in other medical specialties – this will make it easier to fill in the appointment time. It is more profitable to hire a general-purpose specialist in the operation of a small building than to attract plumbers, electricians, and carpenters for one-time work. Of course, you should not get carried away with universalization, but ensuring the full workload of employees, taking into account their ability to perform different types of work, is a good way to save money.
Elimination of overpayments to underutilized employees
If you have a designer on your staff, but he is at best 10% busy, and you pay him an official salary and pay vacations and sick leave, you should think about the advisability of maintaining such a staff unit. Solutions – part-time or outsourcing.
Non-standardized operating mode
Its introduction makes it possible to occasionally recruit workers to work outside the normal working hours and not pay overtime. By law, work in this mode is compensated by the provision of three days of vacation. If this allows you to save on overtime pay, why not use it.
Providing rest days instead of overtime pay
This is also a good way, if, of course, your production process allows you to provide these days of rest. If an employee leaves without using these rest days, they are not subject to compensation – they “burn out”.
Hiring additional staff instead of paying overtime
This method is effective if the number of hours of overtime paid in one and a half/double rate is more than half of the working hours on the production calendar for a 40-hour workweek. In this case, it is worth thinking about introducing an additional staffing unit into the staffing table – it is more profitable to hire another employee who will work for a whole month and pay him a single amount, than pay overtime hours in one and a half/double amount.
Removing unclaimed vacancies from the staffing table
It happens that it is beneficial for managers to keep vacancies on the staffing table. A vacancy may remain unoccupied for months, but no one is in a hurry to fill it. Sometimes this is done to redistribute the salary fund for a vacant position in favor of already working workers under the plausible pretext of encouraging workers who can handle work in smaller numbers. If this happens regularly and there is no search for candidates for the vacant position, the position should be removed from the staffing table.
Summarized recording of working hours
Article 104 of the Labor Code allows you to postpone the payment of overtime at the end of the accounting period. The method is effective for fluctuations in the number and volume of work caused by uneven production workload, seasonal recessions, and rises. The use of summarized accounting should be justified and calculated, since in the event of a shortfall in working hours, you will have to pay a lump sum to employees up to the amount they would have received if they had worked out the working hours. If employees leave during the “underutilization” period, there may not be any savings in the payroll.
Reduction of the number of staff of employees
It is necessary to notify the employee about the reduction 2 months in advance and pay severance pay in the number of 2-3 months’ earnings. The reduction in personnel costs will be noticeable, at best, in 4-5 months after the decision on the reduction is made. This is one of the most costly methods of reducing the wage bill – the savings will only be felt after a sufficiently long period of time.
Revision of labor standards
Fewer workers, or in less time, doing the work available is a model for savings. But the obligation to notify employees about the revision of the norms two months in advance and to formalize the change in essential working conditions with an additional agreement must be fulfilled.
Conclusion of fixed-term employment contracts
The use of this method is limited to the grounds listed in the law for concluding a fixed-term employment contract. If the grounds listed in the law allow you to conclude a fixed-term employment contract with an employee, do not conclude an employment contract for an indefinite period.
When using it, it is worth assessing whether it is beneficial for your company to provide workers with another organization. Of course, outstaffing allows you to reduce management costs (recruitment, labor costs for calculating and paying salaries, etc.), but payment for the services of an outstaffing company that takes over these functions also refers to personnel costs. Be sure to calculate the feasibility of outstaffing in advance to see if you really get the expected savings.
You can not hire staff, but buy a ready-made service, for example, cleanliness in the office, by agreeing with a cleaning company. Will this reduce personnel costs? Formally, the budget for personnel, of course, will decrease, whether it will actually decrease – you have to consider. The cleaning company hires staff, pays employees wages, and makes a profit by providing services. The deal will be beneficial if outsourcing is cheaper than maintaining and managing your own cleaning staff.
Conclusion of civil law contracts
If the work that needs to be done in your organization can be done under a civil contract, great. Performing work within the framework of civil law relations frees you from the duties of an employer – the Labor Code does not regulate such relations. But check whether you really have grounds for concluding a civil contract. A mistake can lead to legal action and negate the expected savings.
Certification of workers
I cannot but mention this “way of reducing costs”, which, unfortunately, exists only in the dreams of managers – “let’s certify employees and, based on the results of certification, we will dismiss those whom we recognize as inappropriate for their position.” Of course, Art. 81, clause 3 of the Labor Code allows you to part with an employee due to inconsistency with the position held or the work performed due to insufficient qualifications, confirmed by the results of certification, but the choice of certification as a way to reduce personnel costs is more than doubtful. Firstly, the employer cannot even fire an employee who is recognized as “inappropriate for the position held”, because at first he is obliged to offer him another job; attempts to use this method as a saving. The risks of litigation and the judicial practice in the attestation procedure are quite large, it is not even worth mentioning – they are very high.
Partial or complete cancellation of social benefits and guarantees
We are not talking about guarantees and compensations, which the Labor Code obliges to provide. If the employer makes payments to an employee based on local regulations, for example, paying for travel, medical services, food, accommodation, and providing material assistance, he has the right to revise them following Art. 74 of the Labor Code If the obligations to provide additional benefits and guarantees are fixed in labor contracts and collective agreements, it is necessary to amend these agreements, it is not easy.
Personnel turnover management
Staff turnover can be influenced by many factors – working conditions at the workplace, work schedule and work schedule, wage system, wages, job security, and the dependence of wages on the volume of work. The employer has the opportunity, without breaking the law, to “naturally” regulate the degree of influence of certain factors on the loss of personnel. I won’t give any hints or examples – everyone has their own ideas about how far one can go in applying this method.
Reducing personnel training costs
Training costs are not an easy item in the personnel budget. You can set cost limits for training one employee, you can set priorities for training and development tasks, which were already mentioned in the article about 5 tasks and 5 principles of corporate training, you can calculate which is more profitable – to train staff on your own or use the services of external trainers and teachers, it is possible and necessary to conclude apprenticeship contracts and training agreements. You can calculate the profitability of personnel training – I already wrote about the calculation rules here. It will definitely not be possible to save money on compulsory education, which, according to Art. 196 of the Labor Code, the employer is obliged to carry out if it is a condition for the performance of certain types of activities by employees. Otherwise, the employer has the right to make decisions on spending funds on training and sequestering the budget for training.
Using tariff-free wage systems
These are remuneration systems that are not tied to a unit of output or time worked (piece rate or salary). For example, payment of a percentage of a concluded transaction or a premium calculated as a percentage of the value of a “closed” contract, a “percentage of revenue”. Regardless of transactions and contracts, the employer is obliged to provide the employee with income not less than the statutory minimum wage, but tariff-free wage systems do not impose obligations on the employee that he is obliged to fulfill regardless of the results of work.
Using tariff scales and coefficients
Differentiation of wages of workers with different skill levels or different working conditions will avoid leveling. Categories of specialists and ranks of workers will help to avoid “overpayments” and “underpayments” for employees with different skill levels and different working conditions. Reasonably built tariff scales will save you money.
Agreement with an employee to reduce wages
It is unlikely that anyone will voluntarily agree to a reduction in wages. But even this can be negotiated if the current working conditions are not maintained in any case. It is impossible to negotiate such agreements en masse, but this method is suitable for isolated cases.
Determining the procedure for forming the fund of incentive payments
A local normative act can describe the procedure for the formation and distribution of the wage fund. So, for example, the wage fund for employees of budgetary institutions is formed for a calendar year, based on the volume of budget commitment limits, respectively, the payment of a larger amount than that in the wage fund is impossible. In the field of public health and education, for example, there is a procedure for distributing the fund of incentive payments in proportion to the points scored based on the results of assessing the performance of employees. A commercial organization can also establish a procedure for the formation of a fund of incentive payments, the amount of which may depend on the results of the company’s activities.
A condition for receiving an allowance, according to the current remuneration system, maybe a mandatory assessment of knowledge and skills to confirm the level of qualifications. As a means of purposeful savings, this method is hardly suitable, but as a way to tie salaries to qualification requirements and avoid unnecessary payments to those whose qualifications have questions – quite.
Indexation of wages
Of course, the lack of indexing at an enterprise is an administrative offense under Part 1 of Art. 5.27 of the Administrative Code. But it is impossible to collect from the employer the amount of the indexed salary if neither the collective agreement nor the local normative act at the enterprise has established an indexation procedure or there are no such documents. The Labor Code does not oblige the employer to index wages in a certain amount, and the recommendations of the Ministry of Labor, which are not a regulatory legal act, cannot oblige to increase wages in proportion to the increase in consumer prices for goods and services. Besides, as follows from recent judicial practice, annual bonuses for employees may well be issued for indexation, if you prescribe in a local regulatory act that you are rewarding employees to increase the level of real wages. In general, if you decide to save on indexing, study the court practice in advance and calculate the consequences.
Optimization of the operating mode
If the production process allows you to perform work in the evening and at night, you can save on the equipment of workplaces – in the evening and at night they will not be idle. Another reason to switch to a shift schedule is the large volume of overtime payments. It may be more beneficial to design work patterns to avoid overtime.
Reducing the requirements for the qualifications of employees
Not gods burn pots. There are not many jobs that need to be learned for years. Well-thought-out scripts, detailed instructions, internal training programs, control procedures that minimize risks and consequences of errors – all this will allow you to stop relying on self-motivated, highly qualified and, as a result, expensive performers. If the production process is fine-tuned, highly qualified and expensive personnel are not needed.
Refusal from corporate events
If this is sacred for someone, sorry. But if it’s in the best interest of the business to cut that waste or redirect that money to other cost items, the result may be more noticeable than an entertainment program for employees.
Non-payment of bonuses due to violations of labor and production discipline
When developing or publishing a new edition of the regulation on remuneration, it makes sense as an appendix to add to it a list of violations of labor and production discipline, which may serve as a basis for reducing the number of incentive payments. Sometimes it is easier to make such an application for certain categories of employees (managers, specialists, workers) than to describe the conditions for reducing the number of incentive payments in the provisions on remuneration for each position.
Reasonable positioning of the amount of remuneration in the labor market
If your company can afford to attract and retain employees with salaries greater than the market average, you can only be glad for you. If you deliberately set high salaries for key specialists, this is a decrease in business risks. If you overpay to specialists whose replacement is not critical for your company, there is a reason to think about differentiating the offer for different categories of employees about the average market salary. You may find opportunities for savings. Just don’t forget to calculate the consequences of possible staff turnover.
Elimination of non-incentive payments
An employee is pleased to receive monthly additional payments for seniority or higher education. Whether this additional payment stimulates to work more and better – it is worth considering for the employer. It may be worth giving up these payments and spending more efficiently.
If an alternative to a possible layoff or other unpleasant prospects can be the transfer of employees to other departments and positions, this may be a better solution than dismissal. In combination with the ban on hiring new employees, this will allow reallocating resources within the enterprise and saving payroll.
Optimization of recruitment costs
Of course, if your recruiting specialists have long been accustomed to unlimited rates for worksites and an unlimited budget for advertising vacancies, it will be unusual to tighten their belts. But managing your recruiting budget wisely isn’t all that difficult.
Reducing staff turnover
In some cases, it is impossible to deal with high staff turnover – for some areas of business (retail, catering) high turnover rates are the norm, but sometimes it is worth evaluating such costs associated with the selection, hiring, and dismissal of personnel, such as overtime pay for employees working in understaffing conditions, as well as the costs of recruiting and training newcomers. Sometimes increasing wages and improving working conditions may be more beneficial than increasing the recruiting budget.
Tightening disciplinary practice
If you are not accustomed to writing memos, demanding an explanation, and imposing penalties for violations of labor and production discipline, at first it will not be easy for you. But the ability to unilaterally decide on dismissal, an employee for whose work there are comments, is worth it.
Refusal from piecework system of remuneration in favor of time-bonus
For the use of piecework rates to pay for labor does not lead to an uncontrolled increase in wages, at least two factors should be taken into account when calculating rates – the labor intensity of the unit of work for which the rate is determined, and the planned monthly wage for a month. In this case, the piece rate is determined by the formula – “the cost of an employee’s hour” multiplied by the “labor input per unit of work”. If you cannot correctly calculate the labor intensity of work, it is preferable to switch to a time-bonus system of remuneration.
Refusal from the tariff-free system in favor of the time-bonus
It is generally accepted that the salary of sales managers, calculated as a percentage of sales, should not have an upper bound. Perhaps to some extent, this is true, but only not in the case when the increase in wages is disproportionate to the labor costs of employees and the financial results of the company. In this case, it is better to focus on the average market cost of specialists, and use bonuses as incentive payments, the condition for the payment of which is the fulfillment or over fulfillment of the sales plan. Firstly, this approach is simpler and more effective than the selection of the percentage rate, in which the employee will strive to work harder, and secondly, the payroll in this case becomes predictable and manageable.
Reducing the cost of overtime work by reducing the time part of wages
When paying double the overtime, only the time portion of the wage is paid. The bonus for work on a day off is charged in a single amount. Therefore, the lower the “salary” part of the salary, the lower the number of overtime payments.
Reducing the cost of overtime by limiting the provision of unpaid leave on “working” days
Some workers have such a practice – to take sick leave or leave without pay, and then “work off” the missed days on weekends with double wages. How in this case to reduce the cost of overtime – to provide days off at the expense of working on weekends for those who do not go to work on weekdays. It is unlikely that it will be possible to prohibit taking sick leave on weekdays, but it is worth considering the provision of time off for work on weekends instead of days of leave without pay – the right of an employee to choose between double pay for days off and pay in a single amount, the employer can legally oppose his unpaid leave.
Method 53. Using a six-day work mode to reduce overtime costs
If workers regularly go to work on Saturdays with double pay for work on the day off, it is easier to switch to a 6-day workweek. If with a 6-day working week, workers are delayed for an hour or two every day, then this work will not be paid as work on a day off – double the amount, but as overtime – the first two hours of which are paid in one and a half rate.