In the corporate world, labor is usually a company’s biggest operational expense. The same is true in the franchise industry. However, labor costs are also highly variable, ranging anywhere from 25-50% of a business’s budget. For these reasons, we always recommend that our candidates consider franchise labor costs when choosing the type of business they want to purchase.
Unskilled, Semiskilled, and Skilled Labor
Before we get into the pros and cons of different types of labor pools, let’s look at some definitions. The Social Security Administration usually groups jobs by three categories: unskilled, semiskilled, and skilled work. These are the categories we’ll use in the this blog post, since they relate most closely to the key labor costs of pay, benefits, and training.
Unskilled Labor
The SSA defines unskilled labor as “work which needs little or no judgment to do simple duties that can be learned on the job in a short period of time.” Despite the category name, this kind of work does require skills. However, they are very basic and usually require minimal education. Where franchises are concerned, unskilled labor includes duties such as dishwashing, stocking shelves, or basic cleaning.
Semiskilled Labor
According to the SSA, semiskilled labor is “work which needs some skills but does not require doing complex work duties.” Proficiency at a semiskilled job usually requires a high school diploma, plus at least several months of training or work experience. Employees might exercise a limited amount of judgment or creativity but usually follow clear and set procedures for their work. Examples of semiskilled roles you might find in franchises include retail sales associate, nursing assistant, administrative assistant, and bus or van driver.
Skilled Labor
The SSA defines skilled labor as work that requires a high level of judgment, independence, and ability to deal with complex concepts or interpersonal situations. This kind of work usually requires a college degree or a high school diploma plus significant training, such as a trade certification. Although skilled jobs make up a smaller percentage of the market, they cover a wide variety of work. Skilled roles in franchises include jobs such as massage therapist, master electrician, certified teacher, licensed mental health counselor, and more.
Pros and Cons of Labor Types
As you evaluate franchise options, keep in mind that your labor pool will significantly affect your franchise labor costs – but not always in the ways you might think. Consider the following pros and cons as you decide which type of labor pool works best for your bottom line and your franchise goals.
Pros and Cons of Using Unskilled Labor
If your primary goal is to keep your franchise labor costs low, you should look first at options that use primarily unskilled labor. These include franchises such as food service businesses, lawn care services, and cleaning services. Since almost anyone can do an unskilled job, the unskilled labor pool is very large and therefore inexpensive. And because unskilled jobs don’t require significant training, you save on staff development costs. This also means that workers begin contributing to the productivity of your business very quickly.
On the other hand, unskilled jobs are notorious for high turnover. They tend to offer little intrinsic value to the worker beyond the paycheck, which means employees can be quick to leave for just a small raise or slight increase in perks. They’re also entry-level jobs, so if you don’t offer advancement opportunities, your best people will quit to obtain promotions elsewhere. Finally, low-cost labor tends to go along with low-cost, low-margin products or services. That means you, as the franchise owner, have to maintain a high level of sales in order to make a profit.
Pros and Cons of Semiskilled Labor
Of course, very few franchises rely completely on unskilled labor. Entry-level employees need managers, and semiskilled employees often fill this role. For instance, shift supervisors at fast-food restaurant would be considered semiskilled workers. Other franchises may use semiskilled workers as their primary labor pool. These include franchises such as those focused on general home repair (handymen), home health care (nurse’s assistants), or medical transportation (van or bus drivers).
Semiskilled labor can be a “sweet spot” for many business owners. Employees earn more than unskilled workers, but turnover tends to be lower, which saves on recruiting and training costs. And although semiskilled workers may require more training than unskilled workers, they often come to the job with transferable skills and can usually contribute to the bottom line within a few months. Finally, the kinds of franchises that rely on semiskilled workers do sometimes have to deal with more red tape. For instance, a home repair franchise may need to be certified as a general contractor. But because the product or service is of higher complexity and quality, you can also charge significantly higher prices.
Pros and Cons of Skilled Labor
A few kinds of franchises have skilled workers in the primary employee roles. These are usually higher-end service franchises, such as tax preparation centers, tutoring centers, and specialized home-repair franchises. Such businesses employ accountants, credentialed teachers, master plumbers or electricians, and other workers with college degrees or extensive training in their fields.
For these businesses, the primary con is the high franchise labor costs. There is only a small pool of credentialed, experienced employees who can operate with a high degree of autonomy in complex situations. That means you must pay them significantly more with other workers. They may also expect benefits, such as health insurance or 401(k) plans, that aren’t always part of the compensation package for unskilled or semiskilled labor.
On the flip side, turnover in such positions tends to be relatively low. Skilled workers also usually require minimal on-the-job training, since they come to the business with significant work experience or external training in their field. This means they can contribute to the company’s bottom line almost immediately. Finally, franchises that rely primarily on skilled workers usually offer the highest revenue potential – a single plumbing repair is worth a lot of fast-food hamburgers!
Levers You Can Pull to Adjust Franchise Labor Costs
We’ve spelled out pros and cons in general terms, but as they say, the devil is in the details. As the franchisee, you can pull many levers to minimize the cons and maximize the pros of specific labor pools.
Work Culture
The biggest lever? The way you treat your employees. Treating your employees well is just the right thing to do, but it also benefits your bottom line. As the Great Resignation is showing us, American workers want more humanity from their employers – and they’re prepared to quit if they don’t get it. Be a business owner who follows the Golden Rule, hire managers who do the same, and you’ll probably find that your turnover rates (and therefore your recruiting and training costs) are lower than your competitors’. Your employees will also likely be more productive and eager to contribute to the success of your business.
Pay and Benefits
Instead of focusing exclusively on the price tag of pay and benefits, factor recruiting and training into your franchise labor costs. Yes, we know we keep bringing this up. That’s because it’s significant: total costs to fill a role can be as much as three times the annual salary. So run the numbers. If you pay your employees a bit more and offer full-time schedules and benefits as often as possible, the impact on turnover may be significant enough to bring your overall costs down.
Promotions
If your franchise relies on a varied labor pool, promote from within. Hire people as unskilled workers and train them on the job for semiskilled positions as your business grows. For an employee with exceptional potential, consider subsidizing the cost of a certification or even a degree for a skilled position. If you don’t have the funds to do this, offer schedule flexibility and job security while they go to school instead. Large corporations and universities have been doing this for decades because it’s usually less expensive overall than hiring externally.
Temporary Workers
Finally, consider temporary workers. Especially if your business is seasonal (e.g., lawn care, pool maintenance, or tax preparation), temporary employees can provide flexibility at a fraction of the labor cost of permanent employees. And if your business grows, you can always offer a temporary employee a permanent position. Bonus: you’ve already seen them in action, so the risk of a bad hire is lower.
If you’ve read all the way to this point, we think you’ll agree that we’ve given you a lot of useful information about how to evaluate franchise labor costs. But if you’re actually ready to start assessing franchise options, you may want more help. We provide expert guidance for the complex process of franchise choice, and our services are completely free. With just a 20-minute phone call, we can figure out if it makes sense to work together. Book some time on my calendar or Lauri’s today!
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