How Do I Calculate Labor Burden Rates?
The basic formula to calculate a company’s labor burden rate for an individual employee is:
Number of actual work hours ÷ the total cost of the employee
= Employee labor burden cost per production hour
Finding the total cost for the employee can be the tricky part. Unless you have an extremely simple employee compensation model or you've already worked with your accountant to compute your fully burdened numbers, you probably won’t have all the needed information at hand. The key is to locate and include those “hidden” costs in your calculations. Here's an example.
Let’s assume that you do indeed have all that ‘hidden” cost information; we can walk through an abridged version of the labor burden calculations.
1. Start by calculating the number of hours an employee (let’s call our employee “Pat”) is potentially available to work. We’ll start with 2,080 hours (52 weeks per year x 40 hours per week). But then, we need to subtract the following non-working periods for the year:
- Six holidays
- 10 vacation days
- Six sick or personal days
- Two days of training seminars
This totals 24 days or 192 hours, leaving 1,888 available working hours.
2. We then subtract about two hours from each remaining work week (47) for miscellaneous administrative meetings, timekeeping, shop time and so forth (breaks are charged to jobs). This reduces the available production time by another 94 hours, so now Pat is actually available for production work for approximately 1,794 hours.
3. Pat’s $17-per-hour compensation computes to $35,360 per year.
In addition, Pat’s employer has additional costs that are “attached” to this job:
- $3,005 in payroll taxes (based on the state unemployment rate of 2.7% on the first $9,000 and no other state disability taxes)
- $3,536 in workers’ comp (at $10 per $100)
- $4,200 in health insurance (at $350 per month)
- $1,060 in retirement benefits (at 3% of compensation)
- $720 in cell phone costs (at $60 per month)
- $150 in uniforms (four logo shirts at $25, one logo jacket at $50)
- $3,000 in company vehicle usage (depreciation, gas and oil, maintenance, license, insurance)
- $300 in small tools and equipment usage (at $25 per month)
- $708 estimated annual bonus (2% of wages)
- $100 employer-paid snacks, meals, parties, entertainment
- $250 in training fees, seminars, etc.
This totals just over $17,000 in additional costs and brings Pat’s annual cost to $52,389.
4. So, Pat’s real cost to his employer is $29.21 per production hour ($52,389/1,794 hours). That’s 72% more than Pat’s hourly rate.
Pat is truly a costly and valuable asset whose time should be carefully allocated to projects and tasks. And Pat's related costs should be closely measured and monitored.
Click here to see videos about the eCPA - Employee Cost & Pricing Analyzer (an easy-to-use, comprehensive solution designed to solve all of your labor-burden cost and employee pricing needs).