You are probably in fairly close touch with each employee’s hourly wage or salary, and may have a good idea of approximately what payroll taxes cost. But you may not have taken the time to research and compute all of the additional “hidden” costs associated with each individual, including:
- Paid time off
- Health insurance
- Worker’s compensation insurance
- Uniforms or special work clothes
- Usage of equipment and vehicles
- Workspace (e.g., office or floor space) costs
So how do we refer to these extra employee-related costs (including taxes)? Here are some of the definitions (and calculations) frequently used by businesses who closely track employee labor burden costs:
Labor Burden: The costs – above and beyond gross compensation – that you incur in order for an employee to perform the work that you hired them to do.
Labor Burden Cost per Production Hour (or Fully-burdened Cost):
(Labor Burden Cost + gross payroll labor cost) ÷ the number of actual work (production) hours.
Labor Burden Rate per Production Hour (%): The additional total labor burden cost, expressed as a percent, above and beyond regular hourly payroll.
Labor Burden Cost per hour ÷ hourly payroll cost.
After you compute an employee’s fully burdened labor cost and then divide it by the number of hours that employee actually works on projects, businesses often find that workers typically cost the company from 50% to 150% (or more), above and beyond their gross hourly labor rate. Getting in touch with, and carefully managing, employment-related costs can be the critical difference between staying in or needing to get out of business.
How to calculate the Labor Burden rate:
The basic formula to calculate a company’s labor burden rate for an individual employee is:
Number of actual production hours ÷ the total additional cost of the employee
= Employee labor burden cost per production hour.