Every business wants to reduce employee costs while maximizing profits, but that doesn’t happen overnight. Gathering accurate financial and workforce data is the first step toward making smarter decisions and growing sustainably.
Table of Contents
- Key Facts
- What Are Employee Costs, and How Can You Reduce Them?
- Use Our Financial Workspace
- Track Hours Worked and Overtime
- Why Does Improving Retention Reduce Employee Costs?
- Devote Time to Headcount Planning
- How Can Reports and Analytics Help You Reduce Employee Costs?
Key Facts
- To reduce employee costs effectively, organizations must combine real-time financial tracking, proactive retention strategies, and structured headcount planning rather than relying on indiscriminate workforce cuts.
- According to the U.S. Bureau of Labor Statistics, private-sector employers spent an average of $46.60 per hour worked on total compensation in March 2026, with benefits accounting for 30.1% of that total cost.
- Replacing a single worker can cost between 50% and 200% of their annual salary, contributing to an estimated $1 trillion in annual voluntary turnover costs across U.S. businesses.
- Employers that adopt real-time cost tracking and structured headcount planning can identify unnecessary labor spend before costs compound, addressing the 52% of employee exits that are preventable.
What Are Employee Costs, and How Can You Reduce Them?
Employee costs go far beyond employee salaries. Being aware of the true cost of employees can help an organization move in the right direction. You’ll be able to effectively delegate work, meet profit goals, and grow your workforce correctly.
Employee costs can come from a variety of areas, including:
- Fringe benefits
- Administrative costs
- Employee tools and software
- Office space or alternative workspaces
To reduce employee costs effectively, track spending across each of these categories rather than focusing on salary alone.
Can You Legally Lower an Employee’s Pay?
In most cases, yes. Federal law does not prohibit employers from reducing pay going forward, but wages can never drop below the federal or state minimum wage, whichever is higher, and cuts cannot be retaliatory or discriminatory. Many states require advance written notice before a pay reduction takes effect. According to the Missouri Department of Labor and Industrial Relations, employers in Missouri must give written notice at least 30 days before a wage cut. Before changing compensation, review your state’s specific notice rules and any employment contracts or collective bargaining agreements.
So how can you take advantage of your financial and workforce data?
In this article, we’ll go over five tips to do so. The first tip is dedicated to our newest finance tool that can do most of the work for you: our Financial Workspace.
Use Our Financial Workspace
One of the best ways you can reduce and manage your employee costs is to really know what’s happening month after month! Factorial’s Financial Workspace has all the essential data you need in one place.
What is the Financial Workspace?
The Financial Workspace is the newest addition to the Finance app on Factorial. It holds financial data and information for CFOs, managers, and decision-makers. It does a lot of the work for you by updating on its own and gathering real-time data.
Get insights on company costs. These include headcount analysis and projections, as well as team and management costs. This allows you to make better hiring decisions, make changes when necessary, and manage future costs. You can do all of this and more without being a finance expert!
See how Factorial can help you gain control over your finances 👇
What the Financial Workspace brings to the table
You, your CFO, or anyone else who has access to the Financial Workspace will be able to get answers to important questions like:
- Number of people reporting to you this month
- Monthly team costs with a timeline view
- How the company cost is balanced among direct reports
- The company costs managed by your direct reports
- Detailed view of reports with name, role, company cost, cost center
Calculating employee costs
Understanding employee costs can help you budget and make better financial business decisions, no matter the size of your business. The Financial Workspace automatically generates employee cost data when payroll summaries are uploaded.
A payroll summary makes things much easier, but it may not always be available. If that’s the case, the Financial Workspace will provide an estimation based on the contract gross salary of each employee multiplied by 1.33 to get the estimated cost.
To put this in perspective, an employee earning $20 an hour typically costs an employer closer to $26 to $27 an hour once payroll taxes, insurance, and paid leave are factored in. This tracks with data from the U.S. Bureau of Labor Statistics, which reports that benefits account for 30.1% of total private-sector compensation costs as of March 2026.
Track Hours Worked and Overtime
If you have hourly employees, keeping track of hours worked and any overtime can help you reduce employee costs by flagging extra or unnecessary expenses before they add up. Keeping track of these hours can be done in a variety of ways. Many companies use timesheets or Excel, but the most practical and effective way is with time-tracking software.
While timesheets may seem like the simpler choice, they’re less accurate. With time-tracking software like Factorial, your employees can clock in and out at the correct moment and not have to guess or round to the hour and minute.
Factorial makes it simple to track hours worked and overtime. In addition, you can analyze metrics like absenteeism to help you make better business decisions.
Why Does Improving Retention Reduce Employee Costs?
Is it surprising to hear that employee turnover is an undeniably large expense for most companies?
In fact, just one resignation can cost a company up to a third of an employee’s annual salary. And with companies losing about 12% of their workforce to voluntary turnover, it’s estimated that in 2022 alone, the overall cost of voluntary turnover was over $1 trillion.
More recent research confirms the trend, estimating that voluntary turnover still costs U.S. businesses roughly $1 trillion annually, with 52% of departing employees saying their manager or organization could have prevented the exit.
If you want to reduce the cost of employee turnover, you must prioritize employee retention. Some effective ways to improve employee retention include:
- defining your EVP and communicating it
- revisiting employee benefit and compensation plans
- having strong leadership
- offering a healthy work-life balance
- gathering and listening to employee feedback
- recognizing and rewarding employees
Research consistently points to management quality as the biggest lever. Analysis found that most preventable exits trace back to how supported employees feel by their manager, which is why pairing regular feedback with competitive benefits remains the most effective method for reducing the high cost of employee turnover.
In fact, Factorial makes it simple to keep in touch with teams and gather feedback. Using Factorial’s Survey feature, managers within your organization can easily create and send out surveys when necessary.
When creating the surveys, choose the frequency, start date and time, end date, participants, whether or not they will be anonymous, and more. Add the types of questions that make the most sense for the survey.
Whether it’s a text answer, a number, rating, or single choice, the options are there. But it doesn’t stop there! Managers and admins can assess the survey analytics once it has closed.
Devote Time to Headcount Planning
Headcount planning, also known as workforce planning, is the process of understanding the employees you have on an organizational level and developing a plan to hire new staff who fit within the structure.
There are a few reasons why a company should implement headcount planning.
A few signs it’s time to invest in headcount planning include:
- Recruitment initiatives aren’t producing quality hires
- Turnover is increasing across teams
- Business growth is consistently over- or underestimated
Monitoring this signal matters nationally too. According to the U.S. Bureau of Labor Statistics Job Openings and Labor Turnover Survey, the quits rate held at 1.9% in May 2026, underscoring how much voluntary movement employers must plan around when trying to reduce employee costs.
Start with an eNPS Survey
Getting started is simple. Start by communicating with current employees. A good place to begin is with the eNPS. In fact, Factorial’s eNPS feature allows you to send out an anonymous eNPS survey to your employees at whichever frequency you prefer. See how it improves, gain insights and feedback from employees, and make decisions based on the scores you have.
Map Skills with an Org Chart
After that, you’ll want to discover any hiring or skills gaps within your organization. Putting together an org chart can help you visualize the skills, backgrounds, and abilities of your current workforce to help you make better hiring decisions moving forward. Factorial’s org chart updates automatically no matter how often you add new employees.
Support New Hires from Day One
And, of course, give support to new talent entering your company. Many people think about or are willing to quit a job within the first month of employment. This can be due to a lack of support, a bad first impression during onboarding or training, or a lack of leadership. It may be time to assess your onboarding and hiring process if you’re seeing drops in retention.
How Can Reports and Analytics Help You Reduce Employee Costs?
Data analytics may be one of the most important things in business. With data analytics, you can follow trends and forecast future results. Not only that, but it can really help in reducing costs.
Factorial allows HR professionals and leaders to create and analyze reports with a few clicks, driving better business decisions related to your workforce and your business based on real-time data. Factorial’s reporting and analytics software allows you to:
- Generate predefined or personalized reports and share them with your colleagues
- Automate your org charts
- Create reports using time-off data and group this by team or office
- Centralize survey results and performance evaluations
- Create performance management reports with data from surveys and 360 reviews
In short, the fastest way to reduce employee costs is to combine four practices: track true labor spend with real-time financial data, monitor hours and overtime, invest in retention to avoid costly turnover, and use headcount planning to hire deliberately rather than reactively.
Want to learn more about Factorial? A free demo may be what you need if you want to start assessing your financial data in the most efficient way possible.
FAQ
What are some ways to reduce employee costs?
To reduce employee costs, organizations can track hours accurately, prioritize retention, and conduct strategic headcount planning. Using an all-in-one business management software like Factorial helps companies analyze workforce metrics, manage real-time costs, and eliminate unnecessary overtime expenses.
How much does a $20 an hour employee cost an employer?
An employee earning $20 per hour typically costs an employer between $25 and $28 per hour, or roughly 1.25 to 1.4 times their base wage. This true cost includes payroll taxes, benefits, and overhead, which Factorial’s all-in-one business management software helps track accurately.
Can you legally lower an employee’s pay?
Yes, employers can legally lower an at-will employee’s pay, provided the reduction is prospective, non-discriminatory, and complies with minimum wage laws. Pay cuts must be clearly communicated in advance and properly documented through integrated payroll and contract tracking systems.
What is the best method of reducing the high cost of employee turnover?
The best method to reduce turnover costs is prioritizing retention through structured onboarding, fair compensation, and proactive employee feedback. Utilizing Factorial, an all-in-one business management software, enables businesses to run anonymous eNPS surveys and analyze performance metrics to boost employee satisfaction.
Every business wants to reduce costs while maximizing profits. That doesn’t just happen overnight! Gathering your company’s financial data is key to making better decisions and growing effectively.
