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June 4, 2021

7 Measures You Shouldn’t Use to Cut Payroll Costs

7 Measures you should not use to cut payroll costs

Your employees depend on you just as much as you depend on them. They're part of your team, and you never want to let them down. In fact, they're a big part of the reason why your business is thriving. So, it can be really frustrating and incredibly heart-breaking when you have to make massive budget cuts that impact them. But even if you have to, there are measures you should not use to cut payroll costs.

When money gets tight, you may feel like there's no option than to cut operating costs wherever you can, which includes making significant changes to your payroll. However, there are some methods you should only be implementing as a last resort (if at all).

Here are 7 Measures you should not use to cut payroll costs:

Here are 7 Measures you should not use to cut payroll costs:

1: Wage and labor cuts

Remember how I said your employees depend on you?

Well, I meant it.

There's a reason why this option is number one on the list of 7 measures you should not use to cut payroll costs. It should be your last--and final--option. 

Here's why: 

Employees carry your business, especially when it comes to customer service. In most cases, the people that work for you are the face of your company.

Most likely (unless you know all your customers by name) they're the first people that come to mind when your customers think of your business. 

Naturally, cutting wages or even issuing layoffs will decrease employee morale. If this happens, their performance is likely to take a hit too. 

The reason for this is simple. By cutting wages you cut a chunk of your employees' livelihood. 

This puts a lot more strain on them to work harder to make ends meet, such as by picking up a second job. 

So instead of getting the 100% effort you used to get, your employees will be forced to give you only 50% of their best effort. 

Additionally, if you make labor cuts, you put more pressure on the remaining employees take on the task of those who were laid off. 

Layoffs also place added stress on employees because they'll be in fear of getting the ax as well. 

We all like to think that this might encourage them to work harder, but the fact of the matter is that it can have the opposite effect. 

Our employees are actually more likely to fail at their jobs because they'll be focusing less on the tasks at hand and more on their fears. 

Place stressed and distracted employees in the same room as customers and it is a disaster waiting to happen. 

2: Pay Cuts To Cut Payroll Expenses

So if you shouldn't cut employee jobs or wages, the next logical step seems to be to cut your own salary right? 

No, not exactly. 

This "take one for the team" attitude is noble, but it can also be problematic. 

Just like your employees work hard to make ends meet, you also have expenses you have to keep up on.

If you cut your own salary, you're bound to hurt your own morale.

Of course, no one is going to be more dedicated to your business than you and odds are you'd probably do your job for free if you had to.

But the added stress of a tight personal budget plus the pressures of running a business will eventually add up.

And that stress will show.

The more you feel the heat of having to play Russian Roulette with your bills, the more that strain will start to show in every area of your life--including your work.

You'll become a worse leader for it, despite your noble intentions. 

3: Chopping Hours To Cut Payroll Expenses

So if you can't cut labor and you can't take a pay cut, what should you do? Cut hours?

This too proves to be a bad idea.

Once again, if you turn full-time employees into part time laborers, they're going to have to get creative about making ends meet.

This means they'll have to cut corners in order to take on multiple jobs.

Even worse, they might just start looking for a new job all together.

Additionally, cutting hours for part-time employees can ultimately hurt your bottom-line more than it can help.

Remember, unhappy employees equal unhappy customers and lower overall performance.

4: Mandatory Leaves of Absence

Lots of employers take on this method, thinking that it's a clever way to cut expenses. 

And in some cases it can be.

On one hand, your employees get to keep their jobs and their benefits. 

This makes it a great option in times of economic crisis when you're strapped for cash.

You can ask your employees to take regular time off (such as twice a month) or it can be set for an indefinite interval. 

On the other hand, it's an unpaid leave (also known as a furlough), which can be detrimental to your employees. 

It can also be legally tricky to enact a furlough, since it would require you set strict rules with your employees.

Here's why:

Employees taking mandatory leave cannot do any work--including answering emails--during that time. If they do, you are legally required to compensate them.

Finally, the biggest reason why furloughs land themselves on list of things you shouldn't use to cut payroll costs is because they actually don't save that much money. 

Sure, you might not have to pay salaries for all, or a portion of, your team, but there is still the cost of benefits.

Additionally, if you furlough your entire staff, or the majority, there is also the potential of you losing clients to other businesses while your company is on hiatus. 

5: Converting to Commissions

If you work in sales, it might be tempting to switch some teams over to commission.

I mean theoretically it should be a win-win, right?

You save money and your employees get the opportunity of making more money.

Here's the problem: You don't want to find yourself having to hunt down a new workforce. 

I know, commission seems attractive, but there's probably a good reason your employees are working for a salary instead. 

Not everyone has the sales skills needed to make commission pay off.

I mean, think about it this way. 

Really good real estate agents know how to close a deal, and they can make a lot of money doing it. 

But while you might hear about some famous realtors, they're few and far between. 

The rest have to struggle to make their commission, and in a many cases, it doesn't work out. 

That fact alone will have your employees running for the hills in no time. 

Additionally, clients might not be crazy about employees taking a more aggressive approach to sales. For customers that can be off putting and it can drive them away. 

But, should this be a very attractive and the right thing to do for your business, you should check out this guide and implement it correctly.

6: Automations to Cut Payroll Expenses

Depending on your industry, automation may or may not be a practical application as of now.

However, as technology continues to progress automation is becoming a more eminent reality for many businesses.

And most businesses are adopting it as a way to cut operating expenses. And it makes sense, doesn't it?

Why pay a human being to do the job if you can just replace that person with software or a machine that costs pennies?

Here's the problem with this:

Sure, machines might be faster, more accurate, and less expensive, but they are also impersonal and sometimes difficult to deal with.

Think about it.

If you've ever gotten stuck repeating a particular word over and over again to an automated system, you've probably found yourself gritting your teeth in frustration and prepared to give someone an earful. 

A machine is no match for human compassion and comprehension. 

If you replace the majority of your workforce with programs, you'll risk losing the aspects about your company that made attractive in the first place. 

7: eliminating Bonuses to Cut Payroll Expenses

Finally, one of the last things you shouldn't use to cut payroll is getting rid of bonuses. 

Why?

Whether you know it or not, your employees look forward to bonuses.

Bonuses, especially during the holidays, can really boost their performance. 

When you get rid of bonuses, it's a big hit to your employees.

On one end, they don't get that extra income.

Equally, cutting bonuses depicts you as a cold or uncaring boss, especially if you cut bonuses for everyone except executives. 

Bonus: Converting to Independent Contractors

This is probably the worst move to cut payroll costs.

Why? 

Independent contractors are not employees, and the employer should not have any control in their work, only the results. 

Such control fall into 3 distinct categories:

  1. 1
    Behavioral: Does your company have complete control over what your worker does and how your worker does his job?
  2. 2
    Financial: Do you control when your worker is paid? Do you supply all the tools and supplies? Do you decide whether or not to reimburse expenses?
  3. 3
    Relationship: Do written contracts exist that outline such things as insurance coverage, vacation pay, pension plans, etc.? Is this work vital to your business, and is this relationship going to continue?

The government is very strict on how workers are classified. 

Why? Because the government, both state and Federal, is interested in collecting payroll taxes. 

To learn more on this topic, read an in-depth comparison between employees and independent contractors

So how can you cut payroll expenses?

I know it might seem that your options are completely limited when it comes to cutting costs.

But there's a better way.

Instead of taking any measures that can hurt your employees, you can actually cut your payroll processing cost. 

It takes a little more work, of course, but it's definitely worth it for both your employees and your business. 

One of the best ways to cut down costs is to outsource your payroll instead of processing in house.

When you opt for a payroll service provider, your dollar goes farther. Not only do you spend less time having to worry about processing in-house, but you're less likely to get hit with costly mistakes. 

However, if you already have a provider, you still might be paying too much for services you don't need. 

Go through your payroll plan, and make sure that you are not paying for extra services that you don't need. 

For example, if none of your employees have a bank account, then you don't need to be paying for direct deposit. 

Additionally, make sure that you weren't lured in by a relatively low base charge, only to find add on features are ridiculously costly. 

Even more importantly, make sure your provider hasn't increased their rates. If they have, it might be time to find a new one.

The closer you look at the details, the more you'll find potential areas where you can save hundreds.

Conclusion

All in all, you want to save money, but you don't want to do it at the expense of your employees, or worse, your business. 

Think about other ways that you can cut cost that won't have major determents.

Don't be hesitant to renegotiate the terms of your payroll service (you usually can) or even shop around for a new provider. 

More importantly, keep in mind that Payroll processing is one area where you can cut expenses, but it's just a start.

There are other services you use that you can also try to rework. 

Maybe you pay too much on your company's internet bill, or maybe the invoice system you're using is charging you too much. 

In fact, your business is more likely to tank because the drop in quality service will drive customers away. 

Exhaust all the resources you can to cut cost in any other way before you let your employees take the hit. 

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Felix Mwania


I live in the intersection of technology and entrepreneurship. I am a technology enthusiast but my passion is helping small businesses succeed, including mine. When I am not working, you will find me goofing with my wife and kids. When not with family and/or friends, you will find me doing some home improvement projects.

Felix Mwania

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