The True Cost of Employment

If you are a tradie, click here to watch Jon calculating the true cost of employment for trades business.

Have you taken the time to look at what the true cost of employment is to your business?

Recently the financial officer of a large business figured out the cost of an employee by performing the following calculation:

Annual Salary ($80,000) divided by weeks of the year (52) divided by hours per week (38):

  • $80,000/52 = $1,538 per week
  • $1538/38 = $40.47 per hour

Is this really the true hourly cost of an employee? He was correct on the hourly rate at face value but when I asked if he knew the real hourly rate is he still tried to convince me it was $40.47 per hour, this is about the time an HR Consultant starts ripping her hair out.

What this financial officer failed to take into account was the real cost implications of hiring an employee; now let the education begin!

Obviously there is a base salary as outlined above, but he had not worked out the associated costs of that employee. Consider an employee on a base salary of $80,000 example, did you know that this employee will end up costing you up to 1.4 times more than $80,000?

  1. Firstly there is superannuation, which is paid on top of the base salary for any employee earning over $450 in a calendar month, which is a minimum of 9%. So immediately you need to factor in another $7,200 that you need to pay out.
  2. Next is annual leave. Although this is built into their wage, you are effectively paying $80,000 for 48 weeks of work in the year, which means the correct annualised wage for the employee is roughly another $6,667.
  3. In addition you have sick leave, which is generally 10 sick days per annum, roughly another $3,333.
  4. Next you have public holidays, again there are usually 13 public holidays in Australia each year, adding another $4,332.90.
  5. Compulsory workers compensation varies depending on the industry you’re in, but can be in excess of 15% of the total annual wages. For our example, we will use 5%, another $4,000.
  6. Payroll tax is payable in each state when you pay over a certain threshold in wages, the threshold and percentages vary from state to state, but QLD for example has a threshold of $1,100,000 and a rate of 4.75%. Even though you may not have passed the threshold yet, if you are planning on expanding your business, you may pass it in the future, and thus should account for it. This would mean another $3,800
  7. Another cost you must consider is the cost of actually recruiting staff, on average this will cost around $5,000, which includes the recruitment costs, down time and training. If your staff member were to stay with you for 2 years, this would be an annualised cost of $2,500.

After taking these things into consideration, your staff member who you employed on $80,000 p/a, is actually costing you roughly $111,833, a new hourly rate of $56.60 a little bit more than the $40.49 my client first thought. Keeping in mind that these aren’t all the costs associated with employing someone, you would also need to consider ongoing training and professional development, office space, stationary, computers, office furniture, staff amenities etc. to get the full cost of employing someone.

Now that you have a better understanding as to what your employees are costing your business what measures will you put in place to reduce turnover and manage non-performing employees to get a better return on investment?

Do you have more questions about calculating the true cost of your employee?

Book a quick chat with Jon Dale our business coach.

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See you later.

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