Employers, management, and employees together run a business. Profitability is a crucial point that needs to be considered in a business and depends on various factors like budgeting, revenue, and labor or employee costs. Identifying and estimating each of the earlier-mentioned factors yields the profitability rate. Therefore, employee costs play a vital role in saving revenue and ultimately earning more than they spend.
Employee cost is not just his base salary; it is a sum of gross salary, benefits, compensations, and insurance. Before hiring an employee, remind yourself of the additional advantages the employee will have.
The human resources team is responsible for hiring and recruiting employees; therefore, they may take the blame on themselves if a company has more employees or pays more to employees than their profits.
In the following article, you will encounter the actual cost of employees, their advantages, and the ways to recruit employees at low rates.
How Can You Estimate Employee Costs?
Recently, a study stated that almost 1.25 to 1.4 times an employee’s cost equals the fixed base salary. If the employee’s salary is $20,000, how is he worth approximately $35,000? A simple explanation is that the salary check given to him is not it. The employee uses electricity, occupies space, uses equipment, and buys software for ease in work; sometimes, he gets bonuses and incentives too. Therefore, calculating all these things expenditure rate of the company increases. So, it is better to estimate employee labor costs to your company before recruitment; otherwise, you will get stuck in a financial crisis.
The following are some points to consider during employee cost determination.
Cost Of Hiring an Employee
Hiring employees also cost money, and you may think of your budget before promising a handsome salary to new hiring personnel. Recruitment cost relies on the company’s hiring practices. There are three things that you may look forward to:
Cost of Internal Recruitment
Filling the vacancy from within the company is internal recruitment and isn’t cost-free. Instead, it includes the time, resources, and money you need to add to internal recruitment costs.
- As described earlier, HR must seek the right employee for a position.
- You can use software or a website where you post jobs, and applicants apply for the job, then you decide who is eligible.
- Background check is a thing to consider when recruiting employees; it includes education, work history, criminal history, etc., so you may require a budget to verify these things.
Cost of External Recruitment
Hiring outside your organization is external recruiting. You must pay 15 to 30 percent to the external recruiter as a retainer fee from the newly hired employee’s salary.
Cost of Onboarding and Training
After successfully hiring an employee, the next step is onboarding, which involves the HR team acquainting the new hire with the office’s rules and regulations. Moreover, going through the procedures, teaching, and training newly recruited employees also require money because it is evident that the new person may make some mistakes that lose money.
You will spend time teaching him procedures if you hire a newly graduated, inexperienced accountant. But when he works independently, he makes many mistakes and costs you money. Or, if you hire a web developer, you must provide him with the necessary equipment, technology, and applications.
Overhead cost is also known as operating expenses. It is the cost of running a business regardless of its success and losses. Moreover, it does not include any particular product or service. For example, to run a business;
- You need a space where your employees sit and work so you can monitor them.
- It would be best if you had the technology and equipment for smooth work.
- When you occupy a space and set it as an office, you must pay utility bills and rent.
All the things mentioned earlier are included in the standard overhead cost, which is the minimum you must do for your business. So, it is necessary to consider overhead costs while adding new talent to your workforce.
How to determine the overhead cost?
Employers pay for workplace rents and utilities in addition to fixed salaries of employees. You can calculate overhead costs monthly, quarterly, or yearly. Figure out your annual overhead cost by dividing the yearly overhead cost with no. of employees in your organization.
Overtime is fundamental to consider when determining employee cost because it is a fixed amount paid to non-exempted or hourly employees when they exceed their working hours. Mostly these working hours are 40 per week, and they spend more time at work, they are eligible for overtime.
Business owners want to avoid paying overtime, and in some countries, overtime is not a thing, but in countries like the USA, it is mandated by law to pay overtime. How do you know that an employee spends overtime because of work or he wants to get paid and dragged his work? In the age of technology, tracking time is not an issue. Many time-tracking apps, like the best EMS software, are available in the market.
Payments are further divided into mandatory and non-mandatory payments.
Some are mandatory payments, like payroll taxes.
Organizations gain a deep understanding of mandatory payments when determining employee costs and calculating budgets because the company must fulfill these payments. In some countries, taxes apply to them when employees’ salary reaches a certain level, like $70,000. While in other, companies must pay payroll taxes. The following are some mandatory payments:
Workers compensation insurance
Workers’ compensation insurance is mandatory in countries like the USA. This compensation is the protection and security of employees that employers provide. How? The company must pay workers’ compensation if the employee gets injured or develops a chronic disease due to the workplace. For this purpose, companies hire insurance agents who guide them.
What is worker compensation’s role in determining an employee’s cost? Here’s your answer: when employers are aware that their industry will eventually cause serious health problems for their employees. They must pay compensation to them; even if the worker dies, they must pay compensation as death benefits.
What if a worker gets injured by his mistake? The company has to pay workers’ compensation regardless of whose mistake it was. So, if you run an industry, you must consider workers’ compensation when recruiting a new employee because it may increase the cost of the employee.
FICA (Federal Insurance Contribution Act) tax
FICA includes Medicare taxes and social security taxes. Taxes may vary according to country and state law. 12.4 percent of social security tax is divided into two halves: one is to be paid by the employer, and the other is to be paid by the employee. Moreover, the social security tax depends on the wage base limit, but the Medicare tax does not. The Medicare tax covers hospital insurance, and the 2.9% tax is split equally between employer and employee. So, consider FICA an essential aspect during cost estimation.
SUTA (State Unemployment Tax)
Employers must pay unemployment taxes if an employee is terminated, and the amount is paid to him. In some countries, these taxes are partially divided among employees too. Before terminating anyone, consider the loss and decide wisely.
FUTA (Federal Unemployment Tax Act)
FUTA is a tax act paid by only an employer or company because these are taxes on the payroll. Employees should not worry about this tax because it’s about the company. So, it dramatically affects the company’s budget and the cost of an employee.
Non-mandatory payments like benefits and insurance
Some companies give benefits to their employees voluntarily to enhance employee productivity and sincerity with the company. Non-mandatory payments also add up to the total cost of an employee. Read below to know the details about non-mandatory payments.
Employers buy insurance packages that include dental insurance and can pay for it voluntarily. Sometimes companies offer to have the employees pay 20 percent of the insurance, but it is totally up to the company what they want to do.
According to the Department of Labor, in 2021, 60 percent of government workers and 40 percent of private workers will have dental insurance.
Healthcare insurance is expensive insurance. It depends on whether the company wants to give a single person health insurance or the whole family of employees, which is more expensive. In reality, only large businesses can afford this kind of insurance, and it isn’t easy to do for small businesses.
If an employee dies, the company must pay his family or dependents for life insurance. It is usually equal to an employee’s year’s salary. If the company promised life insurance, the family would also claim it.
It is in the policy of some companies to give employees a pension after retirement. Also, some companies deduct a minute percentage from employees’ salaries and add it to their retirement funds so they can use it in the future.
Long-term disability (LTD)
If an employee gets disabled due to an injury from an accident or illness, companies provide LTD insurance, in which the employee will get a portion of his work salary. But distinguish it from workers’ compensation. Worker compensation is given when an injury occurs due to work, while LTD covers any injury or accident an employee cannot work.
PTO (Paid Time Off)
Some employees’ benefits include paid time off, which means they will be paid for sick leave, holidays, maternity leave, etc. It will significantly increase the company’s employee cost, so before promising anything, see your budget.
To calculate the leaves and vacations an employee takes in a year, you can use a tracking system like an employee monitor software, which provides an attendance tracking system.
Employee Cost Calculation
In the article, we discussed the factor that increases employee cost, but the question remains: how to calculate the exact cost? Here, the work of mathematics starts. You have to sum up everything mentioned earlier to calculate the actual value.
For example, an employee’s annual salary is 45,000 dollars; you must add all the overtime, recruiting costs, mandatory and non-mandatory payments, and other insurances. An employee will cost approximately 53,000 dollars in total.
What are the factors on which employee cost depends?
There are some factors according to which employee cost varies. See below.
Employee cost largely depends upon the location of the business setup. As you have read above about insurance, benefits, and compensation that a worker receives, you know that it affects employee costs. For instance, the USA has the highest wages and compensations settled according to the law, whereas Uganda has the lowest labor cost. So, location plays a significant role in employee costs.
Size of the company
Employee cost does not deal with small and large businesses alike. Large businesses can afford employee compensation even in the United States, so their employee costs are low. Whereas for a small business, employee cost is high, and it is difficult for them to pay compensations, so employees tend to leave these companies (high turnover rate).
Every industry has a different work culture. Some industries pay total work compensation, while others only pay a portion of standard insurance.
Another aspect of the industry is its type. For example, public schools, hospitals, and IT consulting have the highest labor cost in the USA.
Productivity and work efficiency always matters. Productive employees help the company lower costs as they gain more profit. They yield more products in less time, saving the company’s resources.
If you want to improve productivity of your employees, you can install EMS software and track daily productivity.
Labor cost sometimes depends upon the task an employee handles. Doctors are paid the highest in hospitals, and sweepers or guards are paid the lowest. So, it depends on the task you do, which increases cost.
Another example is that the manager of a company has more responsibilities and things to handle, so he is paid the most in the company, whereas every other designation is below him.
Experience and qualification
Organizations will recruit an experienced, highly qualified, and skilled person at a high cost. Moreover, companies want experienced, proficient people to work for them.
The designation also matters in terms of cost, just as a senior employee earns more than a junior or new hire.
Rate of turnover
Employees quitting a company within a specific time frame is called the turnover rate. Recruiting new employees requires time and money from businesses. It accelerates labor costs as the turnover rate is directly proportional to the cost of employees.
Why is it so? Because hiring and onboarding are challenging; moreover, it requires energy, money, and time to train new people every month, and they leave. So you have to train more. Additionally, it is strenuous and hectic.
An experienced person has high market demand and value, so companies want to have this person in their company. It increases cost, but this person’s demand is because he is good at work and increases revenue, so it is a win-win.
How to lessen employee costs?
Hiring, training, and compensating employees is expensive, so you should consider other ways to lower employee costs and save your company from financial problems. Read below to know more.
The following are the two primary methods for lowering labor costs:
Having a remote workforce can save resources such as electricity, internet usage, fuel, infrastructure rents, etc., ultimately decreasing employee costs. It benefits a company working remotely because sometimes it saves them from paying compensation and insurance.
It will be advantageous for you to hire a talented candidate from a developing nation with a weak economy and exchange rate. To save on labor expenses and increase profits, 27% of businesses outsource. You do not need to hire employees or create a strategy to manufacture your goods; instead, you contract with a firm that does. Outsourcing allows you to access a diversified workforce with a range of talents and competencies. You are free to focus on your job without having to deal with the burden of the matters handled by the outsourced firm.
Outsourcing and scalability go hand in hand as firms expand to meet growing demand. You must hire some outsourced workers to assist you with a particular task if you want your organization to flourish. Your company’s operations will improve thanks to independent contractors’ experience. By outsourcing, you may reduce labor expenses while increasing productivity and efficiency to achieve a high output.
A lot of aspects affect employee costs. These include overtime, overhead cost, recruiting costs, and mandatory and non-mandatory payments. It also depends on location, company size, industry, tasks, experience, education, role, designation, market status, and turnover rate. Businesses must invest time and money in hiring new personnel. It raises labor expenses quickly.
Large companies have minimal personnel expenses because they can afford to pay their workers well, even in the United States. Efficiency and productivity at work are always important. Companies prefer to hire experienced individuals because of their high market demand and worth. Considering all the factors, you can calculate employees’ costs and set salaries according to your budget.
You can evaluate the cost per employee in your organization by dividing annual salary and total working hours.
Both these terms serve the same purpose, but employee cost is considered a more broad term. It includes salaries, compensations, salaries, insurance, and other benefits.
Employee or personnel cost is the sum of salary, wages, commissions, bonuses, incentives, and all the benefits the company provides its workers.
Before hiring an employee, management fixes a salary. There may be bonuses, incentives, or yearly raises, but all of this is already calculated by the company, so employee cost is fixed.