Here are 3 Easy steps to understanding the critical cost of the Employee Labor Burden
Essentially, Labor Burden is the employee cost to a company beyond the salaries it pays the employee. This means all of the other costs associated with having employees which is known as the “Labor Burden” or “Employee Labor Burden” for companies. This is extremely important because owners and managers must understand the Total, or Actual, cost of the Employee. Without understanding these actual costs, companies and their owners or managers cannot accurately estimate costs per hour, day or month for budgets and Jobs.
1. Additional Employee Costs = These additional employee costs can be direct or indirect and could be :
- Payroll Taxes (Federal, State & Local) NOTE: This only includes the Employer’s portion of the taxes paid and not the Employee portion
- Workers Compensation Costs
- Liability Insurance (when the cost is tied to labor)
- Company’s portion of 401K Contribution
- Paid Time Off – This is Time that is paid for by the Employer but not worked by the Employee can can contain (Holiday Hours, Sick Leave, Vacation, Training and Non-Productive Time on the job)
- Benefits – There can be large diversity in benefits given by companies to employees. This could be any additional funds or commissions, products or services given to an employee as part of their compensation. Some types of benefits might be:
- Meal Reimbursements
- Bonuses / Commissions
- Fuel Reimbursements
- Travel Expense Reimbursements
- Outside Meeting/ Coffee Costs
- Paid Health, Dental or Life Insurance
2. Annualize The Costs – The best way to obtain the total Employee Labor Burden is to ‘annualize’ all of the associated costs above. Once you have this amount, you can begin to understand the Actual Cost of this employee.
Its then much easier to break down that total annual Labor Burden Cost into Months, Weeks, Days & Hours. Please keep in mind that when you do want to break it down into hours we want to use only the hours actually worked to get an accurate amount. This is a mistake I made myself many years ago and its a critical point.
Assuming an employee is paid 52 weeks a year and at 40 hours a week, their Total Paid Hours would be 2080. However these are not the hours we want to use to calculate the Burden Cost. We must first deduct all of the paid, but not worked hours. If an employee is given 5 Holidays, 5 Sick Leave, and 5 Company Holidays per year which are paid, but not worked, we would need to deduct 120 Hours (15 * 8) from the 2080 for a total of 1960 Hours of Actual Work Hours Per Year. It is these hours that are divided into the Total Annual Employee Labor Burden in order to obtain an Actual Weekly, Daily or Hourly Cost which is extremely important for owners and managers to complete their budgets or estimate jobs.
Why is this important? Simply stated, these costs are often overlooked and can quickly add up, sometimes beyond profitability of the company. Knowing your Actual Employee Costs, or Labor Burden, is extremely Important to understand, for any company with Employees den is the benefits and taxes that a company must or chooses to pay on their payroll. These can include, but are not limited to, all of the following:
3. Overhead – One last, yet important, factor when considering Labor Burden Costs is a company’s Overhead.
These are the non-Employee Company expenses such as Rent, Utilities, Office Payroll and Other Business or Professional Fees. It’s very important to take this expense as well and understand its impact on your overall Employee Costs.
Because employees are often responsible for generating the income for the company, they must also ‘carry’ the weight of the company overhead costs as well. The more Employees and hours worked, the more this overhead expense is dispersed among the employees. Overhead should not be dispersed equally among employees but rather on based on their actual hours worked. Therefore a full time employee can offset the overhead more than a part time employee. In order to disperse these costs properly and accurately we want to first determine the Total Actual Work Hours for an entire year, as well as determine the Total Overhead for an entire year. Once we have those two we can then divide the Total Annual Work Hours by the Total Annual Overhead. Here as well, Total Work Hours are only those hours actually worked and not necessary the hours paid, so the necessary deductions of hours paid but not worked should be done
The Formula for this would be Total Hourly Overhead Cost = Total Annual Overhead / (Total Paid Hours – Total Paid But Not Worked Hours)
Now once you have this Total Hourly Overhead Costs, you can then add it back to the Hourly Labor Burden Cost along with the Hourly Rate which is paid to get the True Employee Labor Burden Hourly Cost (or Actual Hourly Cost)
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