Thursday, October 29, 2009

High Payroll Costs Killing Three Firms!

In less than six weeks I have consulted for three firms, ranging in sales from $400,000 to $1.6 million and in all three cases the numbers were nothing short of shocking.

One company had allowed its payroll to skyrocket to more than 41%. With typical COG running at an average 26-30% and general overhead expenses running in the mid 30's, this company was bleeding "red" ink.

Shockingly, the owner had never really isolated his direct and indirect labor costs. He simply didn't know what to look for and needed prodding just to take the first step.

What was the first step? Terminate at least 3 employees in the next 48 hours. He did that. Another employee gave the owner her notice about a week later. Her notice had nothing to do with the turmoil at the company. What are the prospects that this company will survive another six months? Probably less than 50-50.

Another company in the midwest had labor costs at 37.6%. Once again, when you see a number like that you ought to react immediately, and not sit back and wonder how much more sales need to increase to bring that number back in line. It really can't be done. Don't delude yourself.

NOTE that is cases where Payroll Expenses are cited, they should not include wages, salaries and benefits paid on behalf of the owner.

My third company is doing a bit better, and has a bit more breathing room, but even this company is in serious troubles with payroll costs above 32%.

By the way, two out of the three companies mentioned above have clearly been violating FLSA (Fair Labor Standards Act) regulations by placing one or more employees on salary and expecting the employees to work "whatever hours are necessary" to get the job done. In one of these cases, the owner has already been fined and is looking at an audit that will cost him $1,000's of dollars in time reviewing payroll records for hundreds of employees going back more than four years.

Anyone who thinks you can simply place someone on an annual salary and thus be exempt from paying overtime is most likely a fool. I couldn't say stuff like that on list servs I formerly belonged to, but I sure as hell can say it here. You are playing with fire when you place anyone on a salary and assume that they are exempt from overtime regulations.

I spent more than 30 minutes today with an owner who was trying to find some loophole that would justify keeping one employee on salary.

By the way, the audit mentioned above - how was it initiated? By one former employee who decided to make a formal complaint with the local wage and hour board. That's all it took to get the ball rolling, and once it started rolling it just got bigger and bigger!

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Blogger Ben Travis said...


I should know this,but it's late and I have a brain freeze! I am sure I can easily find it in your past writings, but wanted to try my luck at leaving a comment. Are you including the working owner's salary in payroll cost percentages? Thanks!

October 29, 2009 at 11:48 PM  

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