For many businesses, the current environment remains challenging. Rationalisation and restructuring, redundancies and payroll reductions are now widely used terms. So what can business owners do to reduce employee costs when they are struggling to meet their day-to-day overheads?

The first thing all businesses under financial pressure need to do is to carry out a root-and-branch examination of current and anticipated future running costs. Business owners should seek their employees' opinions on where and how best overheads can be reduced in their particular section.

Unfortunately, this cost-reducing exercise will not be enough for many companies and a reduction in employee costs will be inevitable. But your employees will recognise that you have tried to find cost savings elsewhere and are now only looking to them as a last resort.

So what other options are open to business owners to reduce staff costs?

Firstly, a recruitment freeze – a freeze on all but the most necessary recruitment will not bring an immediate reduction. However, natural attrition may help a company over a longer period while retaining key personnel.

An overtime freeze also has obvious cost savings, especially if higher rates of pay have been agreed with staff.

Employers can also consider a discretionary bonus freeze in return for performance-related incentives. Another option is the salary sacrifice mechanism. Prevailing salary cuts are averaging between 8% and 10%. However, many employers are sweetening this bitter pill by giving benefits such as extra holidays, share plans or deferred awards. Another option is to implement a shorter working week or a scheduled reduction in hours.

A further potential cost-saving measure is temporary layoffs, particularly for businesses that have quiet periods.

Outsourcing can also bring about significant cost reductions. Not only can this be a money saver but in many cases outsourcing part of a company's offering to experts can increase productivity. Employers can also make a voluntary redundancy offer for non-key staff, in this way reaching desired employee cost reductions. And, finally, enforced redundancies are a last resort.

Whatever the outcome of a cost-cutting review, employee communication and relevant consultation is crucial to maintain workforce morale and remove protracted uncertainty, which if allowed to persist could result in the loss of key people, a fall in productivity and maybe even legal action.

Employers should take legal advice when considering changes to employees' status and contracted terms and conditions.