Many Singapore employers struggle with payroll cost reduction despite it being crucial for maintaining profitability and staying competitive in a high-cost business environment. Rising wages, mandatory contributions, and compliance with employment laws add to the complexity of managing payroll expenses effectively.
Additionally, one of the biggest misconceptions holding companies back is the belief that cutting payroll costs inevitably harms employees. To efficiently cut Singapore payroll costs, employers must think innovatively and plan strategically.
In this article, we would explore practical and innovative approaches businesses can use for payroll cost reduction without compromising their team.
Read next: HR Guide to Expense Management
What are payroll costs?
Payroll costs refer to the total amount spent by a business on employee compensation. These costs go beyond direct compensation like wages, salaries, bonuses, and overtime pay to include the employer-paid portion of payroll taxes, mandatory contributions, and employee benefits.
In Singapore, payroll costs often represent one of the largest expenses for businesses, significantly impacting a company’s financial health and employee satisfaction. A Singapore Business Review study highlights that manpower issues are a major challenge for businesses, with wages accounting for 79% of payroll-related costs.
Effectively managing employee payroll costs is crucial, as mismanagement can lead to serious financial consequences. Proper understanding and management of payroll costs are fundamental to the success and stability of any business.
Payroll costs can be classified into direct costs and indirect costs.
Direct costs
These are expenses directly tied to employee compensation and are usually the largest portion of payroll expenses:
Wages and salaries
These are regular payments made to employees for their work. Wages are typically variable payments based on the number of hours worked or tasks completed, often paid daily or weekly, and are common in manual or hourly jobs.
Salaries, on the other hand, are fixed amounts agreed upon by employer and employee, usually paid monthly, regardless of hours worked, and often associated with professional or administrative roles.
Bonuses and commissions
Both are types of pay given to employees as a form of motivation and reward.
Overtime pay
Payments for hours worked beyond the standard schedule. Overtime pay differs significantly across countries in terms of eligibility, calculation, and rates.
Paid time off
PTO refers to wages paid to employees during leave. This could be a sick leave or vacation leave.
Learn more: The Singapore Annual Leave Entitlement Guide
Indirect costs
These are mandatory or supplemental expenses employers incur beyond direct wages:
Mandatory social security savings plan (CPF, Healthcare, MediShield Life)
This is a tax to fund social security programs, such as retirement, disability, or survivor benefits. In Singapore the mandatory social security savings program is called the Central Provident Fund (CPF). Both employers and employees are required to contribute a percentage of the employee’s monthly earnings to their CPF account.
Payroll taxes
Taxes calculated based on employee wages, such as income tax withholdings.
Employer taxes
Taxes paid by employers on behalf of their employees, like unemployment insurance, worker's compensation, or Medicare.
Benefits
Employer contributions toward health insurance, MediShield Life, retirement accounts, or other perks provided to employees.
Administrative costs
Expenses for payroll software, outsourced payroll services, or the time spent by HR and accounting staff to process payroll.
Key Factors that Impact Employer Payroll Costs
Understanding the factors impacting payroll costs in Singapore is a step towards payroll cost reduction for your company:
Employee compensation
Employee compensation includes wages, bonuses, overtime, and paid time off, making it the largest portion of employer payroll costs.
Taxes and benefits
Another factor to consider when it comes to understanding payroll cost reduction is taxes and benefits. Employers must contribute to the Central Provident Fund and other benefits, which add to payroll costs.
Payroll administration costs
Payroll administration costs involve managing payroll processes, such as software fees and HR staff salaries—all of which contribute to operational expenses.
Regulatory compliance
For companies looking to expand their operations, managing regulatory compliance becomes a critical factor, directly impacting payroll costs. Expanding into new regions means navigating local labor laws, tax regulations, mandatory employee contributions, and reporting requirements, all of which add complexity and expense to payroll management.
Additional reading: The 2024 HR Compliance Checklist: APAC Edition
Economic factors
Economic conditions can influence wage expectations. For example, changes in the cost of living, such as inflation, can lead to increased payroll expenses, as employees may require higher salaries to maintain their standard of living.
Company size and industry
Larger firms or those in specialized industries may face higher payroll costs due to competitive salary demands and compliance requirements.
Tips for Payroll Cost Reduction
Decreasing your payroll expenses can increase the money you keep aside to invest in your business areas that need improvement. Seeing the benefits and the overall impact of payroll cost reduction can have on your business, it is important to consider that while you trim your payroll, make sure your product or service quality isn't affected due to payroll changes.
Considerations to Legally Cut Singapore Payroll Costs
To legally cut payroll costs in Singapore, employers can take several steps while ensuring compliance with local labor laws. Here are some strategies to consider:
1. Review employment contracts
One way to implement payroll cost reduction is by assessing current employment contracts to identify opportunities for cost optimization.
- Fixed-term contracts
For certain roles, employers can consider offering fixed-term contracts instead of permanent ones. This can reduce long-term payroll obligations, such as severance, pension contributions, and bonuses, while providing flexibility for both the employer and the employee.
- Performance-based pay
Link compensation to performance through bonuses or incentives, controlling base salary costs.
- Variable pay components
Including variable pay elements like commissions, profit-sharing, or seasonal bonuses allows for more flexible payroll expenses. This ensures that labor costs scale with business performance, reducing overhead during slower periods.
2. Leverage government incentives
Government incentives are designed to help businesses reduce payroll costs, retain employees, and comply with labor laws. They support job creation, upskilling, and economic stability, allowing businesses to save money while maintaining operational efficiency. Employers can leverage government incentives for payroll cost reduction through various schemes:
- Training grants
These grants support employee skill development, enhancing productivity without significantly increasing payroll expenses.
- Hiring incentives
Programs like the Jobs Growth Incentive subsidize salaries for hiring local talent, effectively lowering overall wage costs for employers.
- Wage credit schemes
The Progressive Wage Credit Scheme (PWCS) co-funds wage increases for eligible employees, providing financial relief by covering a percentage of salary. hikes, particularly for lower-wage workers. This scheme runs until 2026 and requires no application from employers, simplifying access to benefits.
3. Optimize workforce planning
This involves strategically organizing tasks, schedules, and staffing to cut Singapore payroll costs and maximize productivity.
- Outsource non-core functions
Consider outsourcing roles like payroll processing or administrative tasks to specialized providers. This reduces the need for full-time staff and can cut costs associated with salaries, benefits, and training.
- Flexible work arrangements
By shifting some roles to part-time or remote positions, businesses can save on office-related expenses. Employees working from home can also save on commuting costs. This reduces the need for higher salaries to compensate for commuting or relocation.
Read next: Understanding Singapore's Tripartite Guidelines for Flexible Work Arrangements (FWA)
4. Review and optimize benefits
This means carefully reviewing and adjusting the benefits offered to your employees in a way that contributes to payroll cost reduction without sacrificing employee satisfaction or compliance with legal requirements.
Start with negotiating better rates with providers. Look for opportunities to reduce costs on employee fringe benefits such as health insurance, retirement plans, and wellness programs by shopping around for more cost-effective options. Compare different providers and explore package deals that offer the same coverage at a lower price.
Review the types of benefits provided and assess whether they align with employee needs and business objectives. For example, switching from expensive healthcare plans to more cost-effective options or adjusting retirement fund contributions can reduce costs.
5. Ensure legal compliance
To implement payroll cost reduction legally in Singapore, businesses must comply with the following key regulations:
- Employment Act
This law sets out the basic rights and protections for employees in Singapore, covering aspects like working hours, rest days, and overtime pay.
- Foreign Worker Levy
Employers must pay a levy for hiring foreign workers, based on their skill level and sector.
- Income Tax Act
Employers must deduct and remit income tax for employees, ensuring correct tax filings. Compliance with tax laws prevents penalties and ensures employees’ tax obligations are met.
6. Utilize payroll software
Investing in payroll software that automates routine tasks, reduces the need for additional staff, and minimizes errors. This can also impact payroll cost reduction in your business.
Read next: The 7 Best HR Software Singapore Has to Offer in 2024
Manage Singapore Payroll Costs with Omni
Managing Singapore payroll costs doesn’t have to be complicated, as long as you have the right HR tools on your side.
Omni brings clarity and control to your expense management for HR, providing a single source of truth for tracking employee expenses. With our flexible expense policies set up, customize your policies and approval flows based on your unique needs. Tailor expense forms to collect information as per your policies and requirements.
Our employee self-service portal empowers employees to swiftly submit their expense claims, automatically routing them to the appropriate managers with customizable approval workflows. And our user-friendly mobile application allows for on-the-go approvals and communication, so you can manage expenses from anywhere.
If you’d like to learn more about how Omni’s all-in-one HR software automates the entire end-to-end employee lifecycle, saving People leaders from administrative tasks and increasing organizational innovation, book a demo with our team!
