Reducing labor costs essential to saving jobs

May 4, 2009
| By Tom Cole |
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(Editor’s note: This is the first installment of a two-part series.)

In today’s economic crisis, employers grapple with reducing expenses to remain profitable. To the extent labor costs are a significant part of a company’s expenses, there may be options to reducing those costs without terminating employees. The following suggestions may seem extreme coming from the working environment of the past, but the intent is to retain valuable employees while companies remain profitable.

Wages. Pay freezes and reductions are becoming prominent. This approach not only impacts the “pay” aspect of labor costs, but may reduce the cost of contributions to programs that are a function of pay:

FICA (OASDI & Medicare): 2009: 6.2 pecent on $106,800 of wages and 1.45 percent on total wages, respectively.

Unemployment insurance (SUTA & FUTA): Michigan has a three-part contribution formula using wages and benefits paid over three- and five-year periods.  2009: maximum 10.3 percent on $9,000.

Short- and long-term disability: Premiums are usually based on wages.

Life insurance: Premiums are often based on annual income.

Retirement plans: Employer contributions are usually wage based.

Workers’ compensation: Costs are more a factor of accident experience, but also have a wage component in the annual premium calculation. 

Wage adjustments: For companies with the ability to continue giving pay increases, the implementation could be changed from annual to longer periods: 15-18 months.

Rescheduling hours. Reduction of hours can be a useful alternative to reducing wages. If a company wants to take 10 percent out of payroll cost, it becomes a sensitive issue if employees’ wages are cut or they are laid off. However, if cost reduction is linked to a reduction in hours, it may turn a negative situation into a positive one. Everyone enjoys time away from work; reducing hours gets there without severely impacting an individual’s wages, yet can have a significant impact on company costs.

For example, if a business is able to close on Friday at noon and people are paid 10 percent less, the work week stays in basic balance. Utility costs may decrease and increases in unemployment tax rates are not incurred.

Finally, the company may be positioned to install a future variable pay plan. If productivity and profitability reach previous levels (before the economic crisis), employees can be paid more money without reverting to higher wages.

Paid time off. These hours of non-work time have to be made up somewhere. There are six national holidays for which many companies pay employees for not working. Vacations may account for a month of paid time off. These programs are designed to give people a break from the work place; however, companies may want to consider offering this time off without pay. Some employers allow employees to not take paid time off yet receive pay “in lieu of” that time, which increases the cost of labor. Companies may want to consider changing their policies to require time off is used as intended.

Many companies have programs that provide sick pay and personal days. Most of these days are “earned” based on time worked and accumulated year after year. Companies should consider changing this accumulation provision to not exceed the waiting period before STD and/or LTD benefits become payable. Otherwise the payment of unused sick days and personal days becomes added wages, along with accompanying company paid taxes.

Disability. Many companies provide income to sick employees through short- and long-term disability plans. The income replacement level should not encourage malingering. Even though most disability pay plans are subject to income taxes, (workers’ compensation benefits are not), they may not be subject to other taxes the employee pays while working. Additionally, some people have private disability insurance policies. An employee with a company-paid disability plan and personally insured debt plans may have more spendable income while they are sick than when they are working.

Companies with more than 50 employees are required to follow the Family Medical Leave Act. While complying can be complex, there are ways to minimize the negative impact.

Workers’ compensation costs. Many small to mid-size employers believe they have little impact on premiums they pay for workers’ compensation coverage. Attempts to reduce those costs are limited to “funding arrangements,” including high deductibles, self-insurance, retrospective programs, captives, etc. While these arrangements are an important aspect to the liability analysis, individual claim costs and reserves are what drive premiums.

How each claim is managed is critical to reducing costs. Employers who leave claims management to their insurance carrier miss an important role in reducing labor costs. If an employer doesn’t take an active role, particularly immediately following an injury, avoidable costs will be incurred. Often claims develop into problems when close scrutiny in the beginning could prevent them from becoming an issue. Next week’s column will review more workers’ compensation strategies along with a closer look at retirement and unemployment insurance issues.

Tom Cole is a principal with P3HR Consulting Services LLC of Grand Rapids.

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