As inflation hammers restaurants, here are four ways to audit the true cost of HR.
Inflation, supply chain disruptions, and an unforgiving labor market have created a perfect storm for restaurant owners and operators. The mounting headwinds are unrelenting. While many establishments have tried to combat these disruptions by increasing pay, minimizing menus, raising prices, or simply cutting staff and operating hours, there are other strategies that can ease the burdens of the current operating environment without negatively impacting employees or customers.
As costs rise and pressures pile up, the time is now to perform a complete audit of the true costs of human resources operations. We’ve included some straightforward steps below to guide in accurately auditing HR costs.
Uncover the Hidden Costs of Turnover
In 2006, the Cornell Center for Hospitality Research estimated that the average cost to an employer of a turned-over employee to be $5,864. Considering, due to inflation, that $1 in 2006 is equivalent to about $1.46 today, the current cost is roughly $8,561 per turned-over employee. The cost for a company with 100 employees, with a 6.8-percent turnover rate, would be $58,214, or $698,577 annually. That sounds horrible, right? Here’s the bad news, it’s actually worse than that. The following “hidden” costs to HR operations can become significant loss centers over time.
Federal and state unemployment taxes, commonly referred to as FUTA and SUTA/SUI, are often overlooked and/or ignored by operators, but especially with the increased turnover in the industry, it is paramount in controlling HR operations costs.
Every time a new employee is hired to replace one who has left the company, FUTA and SUTA taxes must be started for the new hire. Here is a scenario to help illustrate the compounding effect this has on the bottom line:
- Tennessee-based restaurant operator with 100 employees
- Assume industry average is 73-percent turnover
- FUTA is 0.6 percent and TN SUTA intro rate of 2.7 percent; both on first $7,000 paid
- The potential impact of 73-percent turnover on additional FUTA spend is $3,066 annually (0.6 percent x $7,000 wage cap x [100 employees x 73 percent)
- The potential impact of 73 percent turnover on additional SUTA spend is $13,797 annually (2.7% x $7,000 wage cap x [100 employees x 73 percent])
With a total annual, additional spend of $16,863 in payroll taxes, restaurant operators are potentially wasting another $231 in payroll taxes for every employee that turns over.
What can be done to minimize this cost? The obvious answer would be to reduce turnover, of which there are plenty of opinions that theorize how to do it. However, considering all the factors that makes this a seemingly uphill battle, it is often more fruitful to assess the organization’s current SUTA/SUI rates. If a high SUTA rate (a rate above the intro rate in the state should be considered high), it may make sense to look at engaging a Professional Employment Organization (PEO). There may be a PEO operating in the state that has a low enough SUTA/SUI rate to make it economically advantageous to move onto their Tax ID.
Using the scenario above, if a PEO in Tennessee has a SUTA rate of 1.5, the cost of turnover would be reduced by almost 45%, to $7,665. (Note: It is highly recommended to work only with PEOs that are ESAC-certified.)
Take Advantage of the Soft Workers’ Compensation Market
Another aspect of HR operations that, once in place, is often neglected and/or forgotten about is workers’ compensation. Many operators see this as a necessary evil, and do not want to think about it after the policy is set. However, we find that this approach can lead to significant rate creep over time. It is also recommended to shop workers’ compensation policies every few years, at least.
A word of caution to any operators that are in pooled workers’ compensation plans: these plans likely charge restaurants a 20-30 percent premium to be in the pool. Why? The restaurant is subsidizing the risk to the plan by bringing higher risk codes into the pool. The recourse is to find a comprehensive partner that will allow operators to carve out workers’ compensation and find a plan on the open market. Significant savings can be found with this methodology.
Either way, it is paramount that operators continuously shop their workers’ compensation policy. This will keep the carriers honest, and provide access to the latest products specifically designed for the restaurant industry.
Consider Arbitrary Inflation and Transparency of Administrative Fees
This one is fairly straightforward. If the fee structure with your current payroll/HRIS provider is based on a percentage of payroll, there are a few aspects of this model operators should consider. First and foremost is the impact the current inflationary environment has on the fee paid to providers using this model.
The vast majority of operators have increased wages to keep up with inflation, thereby arbitrarily increasing the fee they are paying their provider. The provider has not done any more work or changed anything about the services they are providing their clients, but they are now paid more to do exactly what they were paid to do prior to inflation.
This also holds true if operators pay bonuses. For every bonus check given to employees, operators engaged with a partner with this structure are paying them a bonus as well. Again, the provider is arbitrarily compensated for providing the same services.
Additionally, these types of fee structures bundle different aspects of HR operations costs together, which are very difficult to unwind. If operators cannot easily determine their administrative fees, workers’ compensation rates (per code), and SUTA rates, they cannot effectively control their HR costs.
Evaluate Your Partnership
If the pandemic didn’t cause leaders to stop and assess how efficiently they were running their HR operations, perhaps the challenges currently upon us will serve as the catalyst to view this as an opportunity to objectively audit the above-mentioned aspects of the business. It’s also an opportunity to assess the relationship between the business and current HR/payroll/benefits providers. The first question should be, “Is this a transaction or relationship?” Examine in clear terms what value the organization is receiving. A true partner is one that is engaged to help their clients meet a stated goal or objective. A vendor provides a transactional service.
While the headwinds currently facing the industry cannot be avoided, it is possible to counteract some of its effects. Digging into these cost centers will enable operators to better control HR costs.
This article was written by Director of Business Development Tye Reedy and originally appeared in Modern Restaurant Management.