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The Real Cost of Employment

The Real Cost of Employment

Sep. 29, 2014 by Rein Petersen

Ask any manager or business owner if they feel they have a good sense of the real costs of in-house full-time employment within their organization and you’ll typically receive confident acknowledgments about payroll taxes, vacation pay, training costs, etcetera.

If you want to watch a business owner shudder and turn pale, let them read this article about the many employment costs they have not considered.

Many don’t realize it, but the real costs of in-house hiring for full-time positions are staggering and can sometimes far outweigh an employee’s actual wage. Every company must seriously evaluate their real costs of hiring internally versus other forms of employment, not simply because their competition is already responding to it, but mostly because they cannot afford to ignore it.

The “Loaded” Rate

These costs are commonly known because they appear clearly noted on payroll journals and are easily accessible from your payroll department. The “loaded” rate includes the standard costs to a business: the employer’s burden of health care and Social Security add (generally speaking) around 7.3% onto cost of employment. Unemployment insurance varies between states but seems to average around 1.5%, pushing the cost of employment, at least the direct tax burden, to 8.8%.

In some instances it makes sense to include those initial costs specific to a hire within the “loaded” rate - usually standard items dispatched to all employees such as uniforms or laptops. These purchases can be amortized across the expected life-time or lease-time of the assets - in our example case, we’ll choose a laptop for our fictional junior web-designer who has a starting base pay of $50,000 per year.

A laptop leased over 36 months might easily cost the organization $50 per month. We’ll turn that cost into a percentage of our new employees wage: $50/mo lease divide by $1000/mo employee wage = 1.25%, which brings our “loaded” rate to over 10%.

You may consider that your new hires have an initial period of reduced productivity while they become accustomed to the job requirements and making their way around your organization. Factor in the time that your other employees must dedicate to training the new hire (doing their work for them while demonstrating) and you may very well settle on a certain number of days of zero productivity by the new hire.

Depending on your organization, you may decide training time wastes 1 week of productivity: the training of your new hire has cost your organization 1/50 (1 week from 50 annual work weeks) in training, or 2%. Now our “loaded” rate is 12%.

What about vacation time, sick days, group health insurance? Neither vacation pay nor sick days are mandated by law in the U.S.A. but since you are in competition with other employers for the best candidates for the job, you will most likely follow the defacto standard of 2 weeks paid vacation + 5 paid sick days with shared group healthcare coverage with the employee.

Group health care costs are rising dramatically see SHRM: Health Insurance Premium Increases Expected to Rise. As of 2014, the national average cost for health care coverage is $11,176 per employee but for our estimations, we’ll err on the side of caution and simplicity using only $5,000 as the employer’s share: add 4% for vacation time, 2% for sick days and 10% for shared group health plan to our “loaded” rate which now balloons to 28%.

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