Managing the Cost of Labor

Chapter 7Managing the Cost of LaborMain IdeasLabor Expense in the Hospitality IndustryEvaluating Labor ProductivityMaintaining a Productive WorkforceMeasuring Current Labor ProductivityManaging Payroll CostsReducing Labor-Related CostsTechnology ToolsLabor Expense in the Hospitality IndustryIn today’s market, the cost of labor is increasing rapidly. As a result, managers must take specific steps to control labor costs and stay within labor budgets.In some foodservice establishments, the cost of labor actually exceeds the cost of food and beverage products.Labor Expense in the Hospitality IndustryWhen labor costs are adequately controlled, management has the funds necessary to create desirable working conditions and pay a wage that will attract the very best employees.In every service industry, better employees mean better guest service and, ultimately, better business profits.Labor Expense in the Hospitality IndustryPayroll is the term used to refer to the salaries and wages paid to employees.Labor expense includes salaries and wages, but it consists of other labor-related costs as well.Labor Expense in the Hospitality IndustryLabor expense includes:FICA (Social Security) taxes, including taxes due on employees’ tip incomeFUTA (Federal unemployment taxes) state unemployment taxesWorkers’ compensationGroup life insuranceLabor Expense in the Hospitality IndustryLabor expense includes: (cont.)Employee health insurancePension/retirement plan paymentsEmployee meals costsEmployee training expensesEmployee transportation costsLabor Expense in the Hospitality IndustryLabor expense includes: (cont.)Employee uniforms, housing, and other benefitsVacation/sick leave/personal daysTuition reimbursement programsEmployee incentives and bonusesLabor Expense in the Hospitality IndustryA salaried employee receives the same income per week or month regardless of the number of hours worked.Exempt employees, because their duties, responsibilities and level of decision making are “exempt” from the overtime provisions of the federal government’s Fair Labor Standards Act.Exempt employees do not receive overtime for hours worked in excess of 40 per week.Labor Expense in the Hospitality IndustryMinimum staff is used to designate the least number of employees and payroll dollars needed to operate a facility or department within a facility.Fixed Payroll refers to the amount an operation pays in salaries.Variable Payroll consists primarily of those dollars paid to hourly employees. In most cases the number of hourly employees needed will “vary” with increases or decreases in sales volume. Labor Expense in the Hospitality IndustryManagement has little control over fixed labor expense, but nearly 100% control over variable labor expense.Total labor expense includes employee taxes and benefits costs and is always larger than payroll expense.The actual amount of taxes and employee benefits paid for by a specific operation can vary greatly.Labor Expense in the Hospitality IndustryPayroll is considered a “controllable” labor expense, unlike FICA taxes and insurance premiums.Other labor expenses, such as taxes and some benefits, over which a manager has little or no control, are commonly called “noncontrollable” labor expenses.In fact, however, managers may be able to influence some of the noncontrollable labor expenses, such as providing a training program to reduce injuries and thus insurance premiums.Labor Expense in the Hospitality IndustryTo determine the number of employees needed in an operation managers must have a clear idea of the productivity levels of each of their employees.When managers know how much work is to be done, and how productive each of their employees will be, the proper number of employees can be scheduled. Evaluating Labor ProductivityProductivity is the amount of work performed by an employee in a fixed period of time.There are many ways to assess labor productivity. In general, productivity is measured in terms of the productivity ratio formula:OutputInputProductivity Ratio Maintaining a Productive Workforce10 Key Factors Affecting Employee ProductivityEmployee SelectionTraining SupervisionSchedulingBreaksMaintaining a Productive Workforce10 Key Factors Affecting Employee Productivity (cont.)MoraleMenuConvenience vs. Scratch PreparationEquipment/ToolsService Level DesiredMaintaining a Productive WorkforceEmployee Selection Proper employee selection is vital in developing a highly productive workforceA job description is a listing of the tasks that must be accomplished by the employee hired to fill a specific position in an operation.Maintaining a Productive WorkforceA job specification is a listing of the personal characteristics needed to perform the tasks contained in a particular job description.It is the manager’s job to develop and maintain both job descriptions and job specifications so employees know what their jobs are and the manager knows the characteristics employees must have, or be trained in, to do a job well.Maintaining a Productive WorkforceManagers selecting new employees have several important tools available to them. These include:ApplicationsInterviewsPre-employment testingBackground/reference checksMaintaining a Productive WorkforceThe employment application is a document that should be completed by each candidate for employment.Job interviews, if improperly performed, can subject an employer to significant legal liability.Maintaining a Productive WorkforceSkills tests can include activities such as typing tests and computer application tests.Psychological testing can include personality tests, tests designed to predict performance, or tests of mental ability.Pre-employment drug testing is used to determine if an applicant uses drugs.Maintaining a Productive WorkforceIncreasingly, hospitality employers are utilizing background checks prior to hiring employees in selected positions.The failure to conduct background checks on some positions can subject the employer to potential litigation under the doctrine of negligent hiring, that is, a failure on the part of an employer to exercise reasonable care in the screening and selection of employees.Maintaining a Productive WorkforceTrainingEffective training will improve job satisfaction and instill in employees a sense of well-being and accomplishment. It will also reduce confusion, product waste, and loss of guests.Effective training begins with a good orientation program.Task training is the training undertaken to ensure an employee has the skills to meet productivity goals.Maintaining a Productive WorkforceSteps For Task TrainingDetermine how the task is to be done.Plan the training sessionPresent the training session.Evaluate the session’s effectiveness.Retrain at the proper intervals.Maintaining a Productive WorkforceA brief plan for each training session should include:Telling employees what they should learn and why it is essential they learn it.Presenting the session.Reemphasizing the main points and explain why they are important.Asking for trainee questions to ensure their understanding.Maintaining a Productive WorkforceSupervisionProper supervision means assisting employees in improving productivity.This is why it is so important for managers to be on the floor, in other words, in the dining area, during meal periods.Maintaining a Productive WorkforceSchedulingEven with highly productive employees, poor employee scheduling by management can result in low productivity ratios.Proper scheduling ensures that the correct number of employees is available to do the necessary amount of work.Split-shift is a technique used to match individual employee work shifts with peaks and valleys of customer demand.Maintaining a Productive WorkforceBreaksEmployees have both a physical and a mental need for breaks from their work.There is no federal law mandating employees be given breaks but some states do mandate them.Employees need to know that management cares enough to establish a break schedule and stick to it.Management must view work breaks as a necessary part of maintaining a highly productive workforce, not as lost or wasted time.Maintaining a Productive WorkforceMoraleManagement can create a fun and motivating environment for employees to work in.Motivated groups usually work for a management team that has created a vision, communicated the vision to employees, and ensured that employees share the vision.Maintaining a Productive WorkforceCreating a vision means creating a real “purpose” for the workforce.A shared purpose between management and employees is important for the development and maintenance of high morale.Managers should recognize all employees for what they do best – including the lowest paid workers. Maintaining a Productive WorkforceEmployee turnover is high in some sections of the hospitality industry. By some estimates, turnover exceeds 200% per year. Managers measure employee turnover by using the following formula:Number of Employees SeparatedNumber of Employees in Workforce Employee Turnover RateMaintaining a Productive WorkforceEmployee separation is the term used to describe employees who have either quit, been terminated, or in some other manner have “separated” themselves from the operation.Some foodservice operators prefer to distinguish between voluntary and involuntary separation.Maintaining a Productive WorkforceA voluntary separation is one in which the employee made the decision to leave the organization.An involuntary separation is one in which management has caused the employee to separate from the organization.Maintaining a Productive WorkforceThe turnover formula can be modified: Number of Employees Involuntarily SeparatedNumber of Employees in Workforce Involuntary Employee Turnover Rate Number of Employees Voluntarily SeparatedNumber of Employees in Workforce Voluntary Employee Turnover Rate Maintaining a Productive WorkforceTurnover is expensive. This expense is comprised of actual and hidden costs.Actual costs include interviewing and training time.Hidden costs refer to new employee errors; for example, the number of dishes broken by a new dishwasher.Maintaining a Productive WorkforceGood foodservice managers regularly calculate and closely monitor their turnover rates.Higher turnover rates usually mean low worker morale and productivity.Lower turnover rates most often means that employee morale is high and workers feel good about the operations that employ them.Maintaining a Productive WorkforceMenuIn general, the more variety of items a kitchen is asked to produce, the less efficient that kitchen will be.Menu items must be selected to complement the skill level of the employees and the equipment available to produce the menu items.Since most operations change their menus infrequently, it is critical that the menu items selected can be prepared efficiently and well.Maintaining a Productive WorkforceConvenience vs. Scratch PreparationThe decision of whether to “make” or “buy” involves two major factors: Product qualityProduct cost.It is important to remember that make or buy decisions typically affect both food and labor costs.Maintaining a Productive WorkforceEquipmentEquipment should be properly maintained and updated as needed if employees are to be held accountable for productivity standards or gains.Service LevelsWhen management varies service levels, it varies employee productivity ratios.Measuring Current Labor ProductivityMethods of measuring productivity:Labor cost percentageSales per labor hourLabor dollars per guest servedGuests served per labor dollarGuests served per labor hourRevenue per available seat hour (RevPASH)Measuring Current Labor ProductivityLabor Cost Percentage The labor cost percentage is computed as follows:It is important to realize that there are several ways to define cost of labor –hourly only, hourly and management, or all labor costs including payroll.Cost of LaborTotal SalesLabor Cost % Measuring Current Labor ProductivityLabor cost percentageIs easy to calculateVaries with volume Changes when pay rates changeCan be challenging to calculate in those institutional foodservice settings which have no daily income figures to report.Measuring Current Labor ProductivityMeasuring Current Labor ProductivityMeasuring Current Labor ProductivityMeasuring Current Labor ProductivitySales per Labor Hour The most perishable commodity a foodservice operator buys is the labor hour. When not productively used, it disappears forever.This is why many operators prefer to measure labor productivity in terms of the amount of sales generated for each labor hour used.Total SalesLabor Hours UsedSales per Labor Hour Measuring Current Labor ProductivityMeasuring Current Labor ProductivityLabor Dollars per Guest ServedSales per labor hour neglects to consider the amount paid to employees per hour to generate the sales, so some managers prefer utilize a labor dollars per guest served ratio.Cost of LaborGuests ServedLabor Dollars per Guest Served Measuring Current Labor ProductivityMeasuring Current Labor ProductivityGuests Served per Labor DollarAs a measure of productivity, guests served per labor dollar expended has advantages. It can be used by foodservice units that do not routinely record dollar sales figures.Guests ServedCost of LaborGuests Served per Labor Dollar Measuring Current Labor ProductivityMeasuring Current Labor ProductivityGuests Served per Labor Hour Guests served per labor hour is a powerful measure of productivity because its calculation does not rely on dollar sales or costs of labor. It is extremely useful in comparing similar units in areas with widely differing wage rates or selling prices.Guests Served Labor Hours UsedGuests Served per Labor HourMeasuring Current Labor ProductivityMeasuring Current Labor ProductivityRevenue Per Available Seat Hour (RevPASH) Revenue per available seat hour helps managers evaluate how much guests buy and how quickly they are served. It does so primarily by assessing the duration of guests’ dining experiences. Duration is simply the length of time customers sit at a table. RevenueAvailable Seat HoursRevPASHMeasuring Current Labor ProductivityMeasuring Current Labor ProductivityMeasuring Current Labor ProductivityMany operators prefer to compute their productivity measures on a daily, rather than on a weekly or monthly basis. This can easily be done by using a six-column form that records cost of labor, sales, and labor cost %.Measuring Current Labor ProductivityMeasuring Current Labor ProductivityDetermining Costs by Labor CategoryFor all productivity measures except RevPASH, operators may evaluate productivity by labor subcategories such as production, service, sanitation, and management. Labor productivity measures for each subcategory can be actual or be estimated for the future.Measuring Current Labor ProductivityManaging Payroll CostsEssentially, the management of payroll costs is a four-step process:Step 1Determine productivity standards.Step 2Forecast sales volume.Step 3Schedule employees using productivity standards and forecasted sales volume.Step 4Analyze results.Managing Payroll CostsStep 1: Determine productivity standards. A productivity standard is defined as management’s view of what constitutes an appropriate productivity ratio in a specific foodservice operation.Productivity standards represent what managers should reasonably expect in the way of output per unit of labor input.Managing Payroll CostsProductivity standards are typically established based on:Unit historyCompany averagesIndustry averagesManagement experienceA combination of some or all of the above.Managing Payroll CostsStep 2: Forecast sales volume.Sales volume forecasting, when combined with established productivity standards, allows a foodservice operator to determine the number of employees needed to effectively serve an operation’s guests.Managers view guests coming to an operation in “block” fashion, that is, in groups at a time, but employees are added to the schedule one full individual at a time.Managing Payroll CostsStep3: Schedule employees using productivity standards and forecasted sales volume.Managers combine sales forecasts with productivity standards to better estimate and control their labor costs.Managing Payroll CostsThe labor cost percentage formula is:When the words “forecasted”, “standard”, and “budget” are inserted, the formula can be restated as:Cost of LaborTotal SalesLabor Cost % Forecasted Total SalesLabor Cost % Standard Cost of Labor Budget Managing Payroll CostsManaging Payroll CostsThe Guest Served per Labor Hour formula is:When the words “forecasted,” “standard” and “budget” are inserted, the formula can be restated as: Guests ServedLabor Hours UsedGuests Served per Labor Hour Forecasted Number of Guests ServedGuests Served per Labor Hour StandardLabor Hours Budget Managing Payroll CostsManaging Payroll CostsManaging Payroll CostsManaging Payroll CostsManaging Payroll CostsBecause employee schedules are based upon the number of hours to be worked or dollars to be spent, an employee schedule recap form can be an effective tool in a daily analysis of labor productivity.Many managers feel that, because labor is purchased on a daily basis, labor costs should also be monitored on a daily basis.Managing Payroll CostsSome foodservice managers practice an on-call system whereby employees who are off duty are assigned to on-call status.In a call-in system employees who are off duty are required to call in to management on a daily basis to see if they are needed.Employee schedule modifications should be done hourly, if necessary.Labor usage must be matched to projected volume.Managing Payroll CostsStep 4: Analyze results.To complete the job of managing labor-related expense, managers analyze results by comparing actual labor costs to budgeted labor costs.Actual AmountBudgeted Amount% of Budget Managing Payroll CostsStandard cost is the labor cost needed to achieve established productivity standards; it is not always the same as “budgeted cost.”In the case of labor, managers may be within reasonable budget, but vary greatly from the standard.Labor standards will always vary somewhat unless guest counts and/or sales can be perfectly predicted.Managing Payroll CostsManaging Payroll CostsReducing Labor-Related CostsIf management finds that labor costs are too high, problem areas must be identified and corrective action must be taken.Managing Payroll CostsReducing Labor-Related CostsOne way to increase productivity and reduce labor-related expense is through employee empowerment, involving employees in the decision-making process.Today, employees have come to realize there is more to life than work. Management, unable to always offer more money, has been forced to come up with new incentives.Employees are seeking job satisfaction in addition to salaries or wages.Technology ToolsCurrent software programs can help manage and control labor costs including the following tasks:Maintain employment records.Conduct and record the results of on-line or computer-based training programs.Compute voluntary and involuntary employee turnover rates by department.Technology ToolsCurrent software programs can help manage and control labor costs including the following tasks:Track employees lost days due to injury/accidentMaintain employee availability records(requested days off, vacation, etc.)Develop employee schedules and interface employee schedules with time clock systems.Monitor overtime costs.Technology ToolsMaintain job descriptions and specifications.Develop and maintain daily, weekly, and monthly productivity reports.Interface employee scheduling components with forecasted sales volume software.