The True Costs of Employees

Employees cost significantly more than the wages they are paid. Staffing costs can be classified into three categories: wages, acquisition costs and recurring costs or labor burden.

Wages are pretty well understood. They constitute the amount paid to an employee for the work performed. This can be in the form of salary, hour rate or piecemeal.

Acquisition costs represent the amount spent to acquire employees. There are both hard and soft costs associated with hiring employees. The hard costs generally take the form of advertising. Whether you use a service such as Monster or CareerBuilder or simply place an ad in the local newspaper, it can cost several hundred dollars to advertise for a vacancy or new position. You may be able to reduce your hard costs by seeking out referrals, but this may not be possible every time or with every position. If you have to advise a position more than once the hard costs can escalate accordingly.

Someone or multiple people in your organization has to screen the applications/resumes received, perform screening interviews, conduct actual interviews, make job offers and perform new employee orientation. Someone also had to produce the job listing. All of these functions take time and, therefore, cost money. The wages that you pay your employees to perform these tasks represent the soft cost of the acquisition process. Under normal conditions you

In addition to wages, there is a number of recurring costs employers pay on behalf of their employees. These are general referred to as labor burden. Some costs you are required to pay such as payroll taxes and workers compensation. Other costs you choose to pay such as medical benefits.

Payroll taxes are comprised of FICA – Social Security and Medicare, Federal Unemployment and State Unemployment. Most employers in most states are required to provide Workers Compensation insurance for their employees.

Social Security is paid at a rate of 6.2% on the first $108,600 of an employee’s wages. This amount typical increases each year. Medicare is paid at the rate of 1.45% of every dollar of wages paid. Federal Unemployment applies to the first $7,000 at a rate of .08%. State Unemployment

Your workers compensation rate may vary by class of employee. Typically, the rate for office employees and sales people are very low. The rate is applied per $100 of remuneration. Remuneration includes other payments in addition to wages that you make on behalf of you employees. These may vary by state by include such items as per diem, rent payments, employee discounts, etc.

Let’s look at an example based on the following assumptions. You are hiring a construction laborer at $12/hour. The cost of the job ad is $300. It will take 16 hours to screen, schedule and interview candidates at an average cost of $12/hr. Your workers compensation rate is 5%. You pay $200 per month for the employees health insurance and $35/month for a cell phone that will be provided to this individual. The total annual cost of the employee are tabulated below:

The total cost of the employee is $31,767.44 or $6807.44 in addition to the wages paid. Few employers take the time to calculate the total cost an employee and rarely do employees understand how much they truly cost their employer. You should share this information. Your employees, especially the skeptics, may think more highly of you when the understand just how much you pay on their behalf.