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Labor Costs

There are many reasons that it is important to understand labor costs fully. For example, if you are examining a new program that requires staff, or if you need to make adjustments to return to target profitability following the loss of a key customer. For these, and many more reasons, understanding your full cost of employment is key.

What are we talking about when we consider the full cost of employment? Everything directly related to the worker being paid for an hour of work would be the full cost of employment. This would include the obvious: Wages, Shift Differential, Overtime, and even a bonus. But what about the next layer? Things such as health insurance, dental insurance, life insurance, paid time off are all directly related to employment. Lastly, there is an even more hard to determine level of employment expense: FICA/Social Security, Worker’s Compensation Insurance, Unemployment Insurance.

Have you ever asked your HR or Finance Departments to estimate the “extra costs” of employment so that you could include it in your proposal? It typically comes back as “20%” or “25%”.

The truth is it varies widely based on two things: are the workers going to be full time with benefits, and what are the employees being paid?

Benefits: First, the key difference between benefits and wage is that benefits are fixed, typically paid as a monthly premium. Wages, however, are paid hourly. Let’s do two examples of someone where the company pays $500 per month toward health insurance per full time worker.

  • If the worker earns $15/hr for 22 days per month, working 8 hour days, the added cost of $500 represents 18.9% of the monthly salary.

  • But, if the worker makes $50/hr for the same number of hours, the $500 represents only 5.7%

As can be seen from the example, assuming 20% additional costs for lower paid full time workers can lead to a large error in calculation.

In conclusion, the full cost of labor varies widely. It is as possibly as low as 10% for a higher paid, non-benefit person, but up to 45% for a lower paid worker getting a standard full time benefit package. The key is to determine your own specific impact based on the wage and set of benefits for the position.

We use an Employment Labor Cost Calculator. To get your free calculator, hit the “Subscribe via e-mail” below and we will SEND it to you.

Do you have any comments on how your company models labor costs or what else you would like to see in a future blog? Comment below.