Are You Spending Too Much on Labour Cost?

Business / 10 Jun 2022

Are You Spending Too Much on Labour Cost?

Labour cost adds up significantly as part of an organisation’s operational expenses. 

Regardless of which industry you are in, labour costs are rising due to new laws regarding minimum and overtime wages, increased demand around parental leave and other benefits.

In the context of any business, labour costs can account for up to 70 per cent of total business costs, including employee wages, payroll, benefits, and various related taxes. 

Still, on average, HR professionals only devote 15 per cent of their time managing labour costs. 

Recently, the Federation of Malaysian Manufacturers (FMM) has requested the government to reconsider the decision of immediate rolling out higher minimum wages of RM1,500 in May 2022

The federation also suggested the government take an incremental approach when it comes to increasing minimum wages to prevent labour costs from going up too much. 

Are your spendings on labour cost too high?

When making the annual report, an organisation considers various components to calculate profits and losses, and labour costs take up a significant portion. These are basic expenses that an organisation has to incur. 

Labour costs include the amount that a company pays directly and indirectly to employees. It comprises the basic wages, contributions to the pension fund, food, allowance, and others. 

The key reasons for increasing labour costs are reduced productivity, higher wages to employees, government regulations, and lack of employable skills. 

If your company’s cost of labour is increasing due to these reasons, you need to take measures to curb them. 

For example, the increase of minimum wages in Malaysia from RM1,200 to RM1,500 will result in an immediate spike of 25 per cent on the basic salary.

Most companies are likely to have a knock-on effect due to higher minimum wage, as it will increase the total payroll cost and other business costs. 

What is labour cost, and what is the average gross revenue for small businesses?

The most obvious question is “What is labour cost?” The labour cost of a company includes all the direct and indirect expenses while managing employees. 

Direct labour costs include wages, payroll taxes, and employee benefits that an employer incurs for employees who do the actual work of producing goods or providing services. 

Indirect labour costs refer to costs for employees who actively participate in the production process. These employees work in the areas such as accounting, marketing, and human resources.

Now, the formula for gross revenue is: 

Gross Revenue = Price x Units Sold

For example, if a small retailer in Malaysia sells 100 units of its new line of shoes for RM150, the gross revenue will be RM1,500.

The average gross revenue for the small business will be: RM15

How to calculate labour cost   

Here is how to calculate labour cost:

We can calculate the labour cost per hour the following way:

Hourly Labour Cost = Gross Wages + Total Related Costs (Payroll Taxes, Overhead)/     Annual Hours Worked

Labour Cost Percent = Total Labour Cost / Total Gross Sales x 100

In a traditional form of labour cost in Malaysia, a labourer today would have to be compensated a minimum salary of RM1,500 per month based on the new law, however, that's not all there is to the total cost. Take a kitchen helper for example, and add the following to the RM1,500 salary earned per month.


  • EPF employer contribution

  • Employee Insurance Scheme (EIS)

  • Healthcare benefits

  • Recruitment agency fees

  • Accommodation (if foreign worker)

The monthly prorated cost can easily total up to RM3,500-RM4,000 with a minimum salary. This has yet to include commissions, overtime and bonuses.

With part timers like GoGetters, you hire and pay-per-hour, anywhere from a minimum of RM9-RM16, entirely just for the hours of work.

GoGet’s pay-per-hour rate structure can look like this:

Are You Spending Too Much on Labour Cost?
Are You Spending Too Much on Labour Cost?

5 Ways to reduce labour cost

Here are the five practical ways to reduce labour costs:

  1. Assess and adjust employee wages 

    You need to review and adjust employee wages and benefits to find scopes to reduce labour costs. You can use tools such as PayScale or Glassdoor to bring down the salaries to the average market value for future hires. You can also roll out performance-based pay raises.

  2. Optimise employee schedules using a scheduling tool

    You can optimise your employee schedules by using a quality tool for better labour forecasting. It will enable you effectively manage labour and help you meet your revenue targets. 

  3. Reduce overtime 

    You can figure out that paying overtime to employees working more than 40 hours can quickly add up to labour costs.

    To lower wages and overtime costs, hiring part-time or temporary workers can be a good idea. Besides reducing overhead costs by hiring pay-per-hour part timers, you can also maintain the well-being of the existing working team and morale, by having extra manpower during peak or seasonal demand.   

  4. Reduce employee attrition rate

    It costs significantly higher to lose an employee than to hire one. Employee retention goes a long way, and employers today can take a multi-faceted approach to create a balance retention programme. Various studies have shown that employees today appreciate flexible working culture as much as (if not more) financial benefits like pay raise.  

  5. Earning tax credits for hiring employees

    In Malaysia, the government offers various tax credits of up to 100 per cent to small businesses for meeting certain conditions. These tax credits will boost your business finances and help you focus on its growth.

Share this article