3 Steps To Control Your Hospitality Labor Costs

Labor costs are killing it, but not in a good way. 

For most hospitality businesses, labor costs are the top expense on the books.

Controlling labor costs has always been a tricky dance, but that’s only gotten more challenging as employee expectations and customer demand (particularly during the pandemic) have coalesced into an unpredictable minefield. Add to it that 20 states raised their minimum wage (along with 36 cities), and you have a whole bunch of factors that are conspiring to make controlling labor costs very difficult, while making it even more necessary.

Tight margins are even tighter. Your room for error just got smaller. You can’t let labor costs destroy your profit margins.

The good news is that the problem of labor costs can be solved. And, even better, that solution can make your business much more adaptable for the future. There are three angles of attack needed to pull this off.

Know what your labor costs are right now

Start with what you know, not with what you’re guessing.

You can’t make any plans if you don’t have an understanding of what your actual labor costs are. Here’s a basic method to calculate labor costs:

Total sales revenue / Total payroll = Labor cost percentage

When you divide your total revenue by payroll, don’t forget to include things like the benefits and other expenses associated with employee payroll. If you’re around the 30% result, you’re in the “safe” zone for the hospitality industry. That means that 70% of your costs are elsewhere. Anything higher than 30% and labor costs are getting away from you.

Every industry is different, of course, but you need to know how much of your money is going just for labor.

It’s not difficult to do the calculation, but how long did it take you to gather all the data to do that simple bit of division? 

When you use tools that keep those numbers at your fingertips, you’re more likely to keep tabs on where you’re at with your labor costs. Wouldn’t it be nice if you could do the math on a regular basis to see if you’re on the right trend? To see if there’s a problem developing that you need to head off quickly?

It’s not that figuring out labor costs is so difficult. It’s that the data needed to do it is too often buried in spreadsheets and time clocks and accounting software. Part of knowing real labor costs is finding a workforce management tool that gives you this updated data on a dashboard so you see it at a glance.

Find where you can cut labor costs

You never want to cut labor costs in a way that will hurt customer experience. Randomly slashing staff without knowing anything beyond the need to save money can do some damage. But you can still cut labor costs without that side effect.

One approach is in adjusting or reducing your hours of operation. That’s a pretty significant step to take, though, and could frustrate customers. 

There are other ways that customers won’t feel as much, but can still do the trick.

  1. Cut or adjust shifts. Don’t be afraid to rethink your shifts. Cutting and changing shifts can help reduce costs. You have to be sure you comply with all labor laws, though, particularly the fair work week laws that ensure employees have a good idea of how many hours they’ll get each week. You won’t do yourself a favor if you make big budget-saving scheduling changes that come with legal penalties.
  2. Fix the overtime problem. Overtime can be the hidden source of soaring labor costs. There are easy ways to reduce overtime. Start by establishing overtime as the exception, not the normal way of operation. Stop using overtime as your “fix” for a badly planned schedule. Make sure your employees have the tools they need to get their work done efficiently. Cross-train employees to do multiple duties so they can step into a gap if demand suddenly increases during a shift—then you won’t have to bring in someone on overtime to do the same thing. And most importantly, monitor overtime so you spot negative trends early on. Use a scheduling app that can alert you to when an employee is closing in on overtime.
  3. Get serious about employee turnover. Hiring and training new employees is expensive, both in money but also in your time. It also feeds the overtime issue because when an employee quits, others have to work longer to fill the gap. Do you have significant employee turnover? Employees leave for many reasons, and not all are in your control. However, are you doing all you can to attract and retain your workers for the long term? It’s easy to miss how this problem eats into your bottom line.

Each of these solutions requires an understanding of what’s going on. You’re back to that data issue, where the information you need should be easy to find and easy to interpret. The tools you’re using, in relation to your staff and labor, can play a role in making (or breaking) your business.

But even if you get the right tools or have a grasp on the data, dealing with shifts, overtime, and employee turnover seem disparate. How do you address all of them?

The good news is that there’s one solution that addresses all three concerns. Plus, it will inject flexibility into your business during a time when a quick response to customer demand and market change isn’t just a nice idea, but a requirement. 

We’re talking about flexible scheduling.

Use flexible scheduling to control labor costs

Flexible scheduling, or self scheduling, is the perfect overlap of giving your employees what they want while allowing you to control labor costs. You decide what schedule coverage is necessary based on your criteria (e.g. shift coverage or required skills for specific duties), and your employees choose the shifts they want. They can swap shifts with each other as long as it falls within the schedule structure.

This saves on labor costs directly.

  1. Less employee turnover. Flexible scheduling allows them to have control over their lives. They get to pick the shifts that work best, and can swap shifts with each other for a give-and-take approach with their work. That’s attractive. It’s a legitimate employee benefit that costs you nothing.
  2. Greater employee engagement. Engaged employees show up and work hard. Since employees are picking shifts they want to work, you see less absenteeism. That helps reduce overtime since other employees aren’t stuck filling in for missing staff. You’ll also see greater productivity because employees are working shifts they chose, not shifts they were forced into.
  3. A schedule that adjusts to demand. Since flexible scheduling uses a structure that’s based on fluctuating demand and need, rather than locking specific people into specific shifts, it allows you to easily dial up (or down) how much staff you need without extensive lead time. You can see a trend coming and add or remove shifts easily.
  4. Less wasted time building the schedule. Let’s not forget the time you’ll save in making the schedule. Manually built schedules easily let labor costs grow. They also waste time you should be using for something else, instead of fussing over schedule spreadsheets or playing phone tag with employees to assign shifts.

Flexible scheduling makes predicting and controlling labor costs possible. Because of its real-time nature, it provides information you need now for decisions you’re making in the next day or week.

It’s a scheduling approach that isn’t going away.

Things changed quickly last year, and while some sense of normal slowly returns, the desire for flexible scheduling is here to stay. Employees got a taste of empowerment over their work-life balance, and many business owners saw a chance to actually embrace crazy fluctuation for their benefit.

By solving a real problem like labor costs, you’re creating an entirely new (and strong) future for your business.

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