10 tips for how to reduce labor costs in your retail business

Running a retail business is rewarding, but it can also be expensive. From managing inventory to staying on top of location leases to the cost of labor, there’s a lot of money flowing in and out. 

Your biggest expense? Labor costs. Fortunately, there are ways to reduce labor costs in your retail business.

Don’t get us wrong—having employees is great. A team makes it possible to stay open longer, serve more customers, and even scale your shop to additional locations. But if you’re not keeping tabs on all of your labor costs they can come as a bit of a surprise—and not the good kind.

What are labor costs?

Your labor costs are everything you pay in order to keep employees on your payroll. As a retailer, this typically includes costs such as employee wages, benefits, and payroll taxes. 

Labor costs are usually divided into two categories: direct costs and indirect costs.

Whether a cost is direct or indirect can depend on the industry. But in retail, direct costs are usually tied directly to a sale. Meanwhile, indirect costs play more of a supporting role.

For example, the wages for your cashiers and sales team are typically considered direct labor costs. But if you have multiple locations and require an HR team, those wages would be considered indirect labor costs.

What contributes to your total cost of labor?

When we think of labor costs our brains often jump right to employee wages. 

Of course, what you pay your employees is a huge part of it. But there are so many other direct and indirect costs that can unexpectedly drive up your total cost of labor. According to a Bureau of Labor Statistics report, wage and salary costs only made up about 70.5% of all employee compensation costs in 2022.

So where does the remaining 29.5% come from? Let’s break down some of the labor costs that retailers often face:

• Employee wages: These costs are relatively straightforward. This is the gross hourly wage you pay to your employees. If you pay your management a salary, those would also fall into the bucket of employee wages.
• Additional compensation: Sometimes retailers will pay employees outside of their normal wages. This additional compensation usually includes overtime pay, sales commissions, or even work bonuses.
• Employee benefits: These are all the costs you pay to offer employee perks. Employee benefit costs often look like healthcare insurance premiums, retirement contributions, or the cost of employer-paid wellness benefits.
• Paid time off: This one might be a surprise, but you can incur labor costs even when your employees don’t come to work. Whether it’s sick days or vacation time, the cost of these paid time off benefits should also be rolled into your total labor costs.
• Payroll taxes: These include state employer-paid taxes, such as unemployment insurance (SUI), or federal employer-paid taxes like Social Security and Medicare taxes.
• Hiring and training costs: From hiring and onboarding to ongoing training, labor costs should also include any expenses you face to help employees do their jobs.
• Administrative costs: These are usually indirect labor costs like the software you use to pay your employees or the salary of an HR benefits coordinator.

Put simply, if it helps keep your employees on the job, it’s probably a labor cost.

If you’re feeling a little shell shocked, we get it—it’s a long list to keep track of. As a small retailer, you might not have all those costs just yet. But it’s still important to have a clear understanding of your true cost of labor. Otherwise, that new employee you just hired might be costing a lot more than you expected

How to calculate labor costs

Calculating labor costs plays a major role in financial and resource planning for retail businesses. It’s the first step to seeing how your labor costs stack up against your overall business expenses. And it can inform everything from your pricing strategy to your employee scheduling.

So let’s break it down.

Here’s an example:

In the last fiscal year, you paid $100,000 in gross annual wages. The cost of payroll taxes, employee benefits, and all other overhead costs add up to $20,000. Your total annual labor costs are $120,000.

In a shift work environment like retail, it can also be valuable to break down your labor costs by the hour. This way, you can see exactly how much you’re spending on labor compared to your other expenses and sales forecasts.

Let’s look at the hourly labor costs based on the previous example.

Your total annual labor costs are $120,000. If your employees collectively worked a total of 6,000 hours throughout the year, your hourly labor costs per employee is $20.

$120,000 / 6,000 hours = $20 per hour

Why lowering labor costs should be a priority in your retail business

As a small retailer, your labor costs are one of your biggest expenses. Your employee’s time and labor can account for as much as 70% of all your business costs combined. Because the costs are so high, reducing your labor costs by even a small percentage can make a huge difference. Imagine what you could do with all that extra cash.

But reducing labor costs isn’t about cutting corners so you can increase your profits. Strategically managing your labor costs can actually help your business grow in the long term—and maybe even employ more folks in the future.

Reinvest those savings back into your business. Repurpose saved labor costs for marketing or updating your inventory. And in a fierce retail landscape, scaling back on labor costs can even improve your margins so you can offer more competitive pricing. 

10 ways to reduce labor costs in your retail business

The case for reducing labor costs is a no-brainer. 

But it’s not as simple as laying off employees so you can save on wages and taxes. Labor cost reductions need to be done strategically so you’re still delivering a stellar customer experience.

Here are some top tips for how to reduce labor costs in your retail business so you can rack in those savings.

1. Track labor hours accurately with a time clock

If you don’t have an accurate picture of how much time your employees spend on the clock, you won’t be able to accurately calculate your labor costs. This makes it difficult to get a handle on where you might be able to make adjustments. 

Time clocks are designed to track when employees clock in and out of their shifts. It takes the guesswork out of calculating the exact number of hours that your employees are working. Time clocking uses the exact times your employees clock in and out, and automatically spits out timesheets and wages, so you can keep a closer eye on your labor costs.

Plus, it’ll save you the headache of adding up hours when it comes to running payroll.

And in the spirit of savings, we’ll let you in on a secret. You don’t need to spend hundreds of dollars on a clunky punch clock that no one wants to use. Homebase’s free mobile time clock app lets employees clock in right from their phones, or from a tablet, computer, or POS device at work—so you never have to worry about time tracking again.

2. Optimize your employee scheduling

The perfect employee schedule probably doesn’t exist—but you can get pretty close.

If you accidentally have too many employees on the clock, you’ll be paying your team to refold the same pile of shirts for the hundredth time. But if you don’t have enough and you’re understaffed, it can be challenging to meet your customer needs.

When it comes to retail employee scheduling, sales forecasts and customer demand trends are your best friend. These can give you a sense of how many customers you can expect and how many employees you need on the schedule to deliver a quality experience.

Of course, none of us have crystal balls. So it’s impossible to predict exactly how many employees you’ll need at any given time. But optimized schedules and alternative scheduling strategies can also reduce the risks of being under or overstaffed.

3. Improve employee retention

Cutting labor costs doesn’t always mean reducing the size of your team. Sometimes, it means finding ways to keep your best employees.

High employee turnover can cost a pretty penny. Of course, there are the tangible costs of hiring and onboarding replacements. But you’ll also face less quantifiable costs like decreased productivity and the loss of valuable institutional knowledge from long-term employees. When an employee leaves it can take the equivalent of six to nine months of pay to find and train a replacement.

Here are some ways you can improve employee retention to save on labor costs:

• Offering flexible scheduling that fits employee needs
• Providing higher compensation and benefits (Yep, you read that right—increasing wages can actually save you money in the long run)
• Building a positive workplace culture

4. Improve employee productivity

What they say is true—time is money. You’re paying your hourly shift workers for their time on the clock. Whether they accomplish one task or five, they’re getting paid the same.

There are a lot of reasons employees may be less productive. Sometimes it’s because they’re stuck doing repetitive and tedious tasks. Or other times it’s because they’re distracted, bored, and lack direction.

Implementing time management strategies and productivity tools can help your team accomplish more while saving on labor costs. 

5. Increase employee engagement and happiness

Retail is a fast-paced and demanding business. Throw in the unpredictable hours and it’s no surprise that retail employees tend to experience high levels of stress and burnout.

When morale is low, employees are likely to be less productive, disengage, and might even look for a new job somewhere else. But it’s still possible to improve employee happiness in a retail environment. Some strategies to boost employee engagement:

• Provide meaningful work
• Foster strong team communication
• Prioritize employee appreciation
• Create an environment of trust and transparency
• Offer training, growth, and development opportunities

Building up employee engagement doesn’t just help you reduce labor costs, it can actually help you earn more. Companies with engaged employees enjoy up to 147% higher earnings than the competition. 

6. Focus on the customer experience

Engaged employees make for happy customers. But it clearly works the other way around too.

Retail employees are often the first point of contact for customers. And 68.5% of retail workers find themselves faced with angry or frustrated customers while on the job.

When customers are unhappy you need extra team members to handle the complaints and issues. And let’s be real for a second—dealing with angry customers isn’t exactly a walk in the park.

Crafting a great customer experience is a win-win for everyone. Sure, your customers will have a great shopping experience. But it’ll also create a less stressful and positive work environment for your employees. Companies that nail the customer experience, tend to have 1.5x more engaged employees than those that don’t. 

So while customer experience isn’t a direct labor cost, it can go a long way in helping you retain a team of happy employees. 

7. Streamline your payroll processes

If the thought of running payroll makes your head hurt, you’re not alone. For many small business owners or managers, paying your employees can be an incredibly painful and time-consuming process. 

The good news is that it doesn’t have to be. Save yourself the head and the administrative labor costs by streamlining payroll with payroll software.

Automated online timesheets calculate hours, breaks, overtime, and wages for you. (AKA no more calculators and spreadsheets.) Automating payroll also reduces the chance of human error in the process, meaning you can feel confident that you’re paying your employees the right amount every time.

8. Reduce payroll leakage

As a small business owner, you’ve probably seen it all. From employees waltzing in 5 minutes past the start of their shift with coffee in hand to eager employees taking their sweet time to clock out. 

A few minutes here and there can feel harmless but that lost time adds up quickly. These unexpected labor expenses all fall under the category of payroll leakage. Payroll leakage and time theft can appear in a lot of different ways, including:

• Buddy punching
• Clocking in too early 
• Clocking out too late
• Taking breaks while on the clock

Having policies around clocking in and out and setting shift expectations can help you manage losses related to payroll leakage. You can also proactively reduce intentional or unintentional time theft by implementing tools that prevent employees from clocking in early or provide notifications when they forget to clock out.

9. Limit overtime 

In retail settings, having employees go into overtime is pretty common. Maybe you needed extra employees to support an unexpected rush of customers. Or perhaps a pesky inventory issue meant you needed to run an extra inventory count.

Regardless of the reasons you might run into overtime, accidental overtime is one of the quickest ways to drive up your labor costs.

In the US, anything over 40 hours a week is considered overtime. When non-exempt employees slip into overtime, they’re entitled to a minimum of 1.5x their regular pay rate. While the extra pay might be nice for your employees, these overtime costs can really add up.

Sometimes overtime is unavoidable, but there are ways to minimize it. Keep a close tab on time sheets and stay on top of sales forecasting so you know when you might be better off hiring more employees. You can also set overtime alerts when employees are close to overtime, so you can adjust schedules before overtime becomes a problem. 

10. Invest in employee training

Upskilling your retail employees can help them do their jobs better and more efficiently. You’ll reduce errors and get more done in less time. The savings from employee training can free up time for employees to focus on more exciting projects or even cut back on shifts altogether. 

Cross-training to increase team flexibility is another cost-saving tactic. For example, a salesperson who is also trained in inventory management can work on the sales floor and in the backroom. Cross-training provides the flexibility for you to handle different responsibilities, without having to dip into overtime or hire separate employees for each role.

Of course, depending on the type of training needed, it might be an upfront investment. But the long-term labor cost savings are usually worth the immediate costs.

As a bonus, offering growth and learning opportunities is a tried and true way to boost employee engagement and retention.

Need a better time-tracking solution?

Track hours, prep for payroll, and optimize labor costs—all with our easy time clock app. Try the Homebase time clock app for free.

How to reduce labor costs FAQs 

What are labor costs in retail businesses?

In a retail business, labor costs are all the expenses you incur to keep your employees on the job. This typically includes employee wages as well as the cost of employee benefits, payroll taxes, and other employee-related overhead expenses.

How can you calculate labor costs?

Labor costs are typically calculated by adding your employees’ annual gross wages with all other employee-related expenses. This should include costs like payroll taxes, benefit premiums, insurance costs, and more.

You can also get more specific by calculating your hourly labor costs. Just take your total annual labor costs and divide them by the number of hours actually worked. 

Calculating labor costs is the first step to reducing labor costs. It helps you measure the costs of labor against your sales and other business expenses so you can make informed decisions about how to make the most of your employees’ time.

How can you manage labor costs in a retail business?

There are many ways to manage labor costs in a retail business, including better time tracking, optimizing employee scheduling, and reducing payroll leakage. 

You can also reduce labor costs by upskilling employees, reducing turnover, and improving employee productivity. These tactics can help you do more with fewer employees, allowing you to scale your business more efficiently and without having to hire a ton of new employees.

How does using a digital time clock help reduce labor costs?

Digital time clocks help reduce labor costs by accurately tracking employee hours and reducing payroll leakage. The best digital time clocks will automatically calculate employee hours and turn them into timesheets and reports, so you can easily compare labor costs against your sales forecasts. 

When you know exactly how much of your money you’re spending on labor, you can make better decisions around managing your labor—whether it’s improving productivity, investing in training, or reducing the number of employee shifts.