9 Options When You Have to Cut Personnel Costs

For many companies, personnel and personnel-related costs represent the biggest chunk of their expenses. During this pandemic, companies of all sizes have had to take a closer look at their personnel costs to see where cuts can be made. This has resulted in millions of people losing their jobs. But what if there were alternatives? Maybe your company doesn’t need to lay off as many people as you might have thought, in order to survive.

1. Switch Full-time Employees to Part-time

Consider making non-essential employees part-timers rather than full-timers. To be fair, you’ll probably have to offer a part-time wage that is higher than what you’d normally pay a part-time employee. But because they’ll be working fewer hours—less than 30 hours per week—you’ll end up paying less. A word of warning, though. As a rule, salaried employees aren’t required to get overtime pay rates when they work more than 40 hours per week. But if your part-time employee works overtime, most states have laws that require you to pay them time and a half or more. This strategy also requires more hands-on scheduling, a time clock system and keeping a close watch on potential overtime issues.

2. Implement Temporary Salary Cuts

It’s not easy to ask valued staff to take a salary cut, but if the choice is between being laid off or taking a temporary cut in pay, most employees will choose the latter. If you decide to go down this path, first get together with your CPA to determine exactly how big of cuts you’d need to make in order to make a big enough difference. Then you’ll need to internally determine how you’re going to spread those cuts out among staff. The best—and safest in terms of legal ramifications—is to implement salary cuts as a straight percentage, where everyone shares the same percentage. The actual numbers will vary because of different salary amounts, but no one will be able to say you acted discriminately.  

3. Transition Into Temporary Staff

Depending upon the nature of your business, you may be able to take advantage of using temporary staff and letting go of at least some of your permanent staff. A move like this is best suited for seasonal businesses where there are marked surges and lulls in business. You’d bring in temporary staff during surges and rely on a skeleton crew of permanent staff during lulls. Another benefit of using temporary staff is the relief from the burden of paying insurance benefits.

4. Offer Unpaid Leave

Some of your employees might appreciate taking leave, even though it’s unpaid. It feels like a big ask from an employer standpoint, but keep in mind that many of your employees may have working spouses and families. In cases like these, they may relish the chance to spend some time at home with family, working on private projects or taking care of extended family needs. During the unpaid leave, you’d save on payroll and payroll taxes. Make sure you put the deal in writing—ideally with a definitive return date—so that you don’t inadvertently lose a valued member of your team.

5. Restrict Expense Accounts 

Expense accounts are an often-overlooked personnel cost that is usually easy to curtail. Bear in mind that employees who pay for company expenses out of pocket can still take the tax deduction on their own personal taxes, so it’s not a huge burden for employees. You’ll lose the deduction on your business taxes, but you’ll also lose the expense, which will help your bottom line.

6. Suspend Fringe Benefits

Fringe benefits are another small but significant personnel cost that can be temporarily eliminated or reduced when you need to. For instance, you can stop paying for gym memberships. (Employees might not mind if they can’t visit the gym anyway due to COVID.) You can stop stocking the company kitchen with beverages and snacks. Instead, install vending machines and encourage employees to bring in their own snacks. You can stop leasing the employee-of-the-month parking spot. For the sake of employee morale, plan on bringing back fringe benefits when finances allow.

7. Freeze Reviews and Raises 

Employee reviews are always eagerly anticipated because they usually mean a pay raise is also forthcoming. But when cutting personnel costs, you’d do well to freeze both reviews and raises. Freeze both because employees shouldn’t have to sit through a review if you aren’t offering a raise to with a positive review. And, you can’t review a bad performance just because a raise isn’t justified, either. Again, assure your employees that these are temporary measures designed to keep the business flush.

8. Temporarily Decline Your Salary

A drastic, yet effective way to cut personnel costs is to decline your own salary for the interim, just until you can get over the financial hurdles. You’ll be able to save on the salary itself and the payroll taxes. Just be sure to consult with your CPA about the best way to handle this, since the IRS frowns on salary “manipulation” in order to avoid taxes. This isn’t what you’d be doing, of course, so your CPA can help make it all above-board.

9. Reduce Retirement Contributions 

Retirement contributions are a huge benefit that can help your company to attract the best talent. But when times are tough and you have to choose between the health of your company’s finances and the retirement accounts of your employees, this could be a place where you can save money. If you temporarily reduce retirement contributions, your tax deductions will decrease, but you’ll be able to have more operating cash for inventory, marketing, client management and more. Again, be sure to consult with your CPA to determine if this is a viable option for your business and if so, how much to reduce them.

Letting staff go permanently during the pandemic is a drastic measure that solves a short-term problem with a long-term plan. Instead of resorting to such measures, consider one or more of your other options, as outline here.