Calculating actual labor costs is a critical factor in making sound financial decisions, regardless of the size or industry of your business. For example, if you know the true cost of an employee, your finance and HR teams can accurately budget for expansion into a new market.
Personnel costs include multiple factors such as employee salary, payroll taxes, fringe benefits, and other expenses such as company withdrawals and overheads. Employers also need to understand the variables that affect labor costs, such as: B. Location and Market Conditions.
With a strategic focus, employee cost estimates can help you make the right decisions for your business. This guide provides everything you need to know about calculating accurate employee costs and provides key tips on how to reduce per-employee spend.
Table of contents
- How are the personnel costs calculated?
- Key variables affecting staff costs
- How to calculate the cost of an employee
- Expenses to be taken into account when calculating staff costs
- This is how you reduce personnel costs
- The risks of inaccurate personnel cost payments
- Hire with confidence and at an affordable price with Velocity Global
How are the personnel costs calculated?
Companies calculate labor costs by adding up all relevant costs associated with an employee over the course of the year and dividing the total into an annual, monthly or hourly rate. The costs include the gross salary, wage taxes and additional expenses such as fringe benefits.
Below we list the variables that affect labor costs in different markets worldwide. We explain how to calculate payroll taxes by location and provide a simple formula to accurately calculate your employees' annual costs. Finally, we propose some useful strategies to reduce the cost per employee.
8 Variables Affecting Labor Costs
Below are eight variables that affect labor costs.
1. Location
The location of your employee's place of residence has a major impact on personnel costs, as labor laws and the cost of living vary from country to country. For example himstatutory pension tax in QuebecIn 2023 it is 12.8% and applies to income between CA$3,500 and CA$66,600, while the same tax in other parts of Canada is 5.95% and applies to the same income bracket.
The cost of living also varies around the world, affecting employee salaries across cities and countries. For example, a junior graphic designer in New York City will likely command a higher salary than a junior graphic designer in São Paulo because the cost of living in New York City is higher.
How is the cost of living for employees calculated?
Employers calculate the cost of living for employees by adding up the cost of goods and services that consumers spend their money on in the employee's city or region of residence. The costs include things like food, shelter, and medical care.
The following cost of living indexes forrestingto illustrate how widely the cost of living varies from country to country (compared to New York City's cost of living index of 100):
Cost of living and rent index by country in 2023
2. Industry
2. IndustryThe industry you work in also affects labor costs due to different tax rates in the industries. For example, the unemployment insurance tax rate for new employers in Pennsylvania is 10.59% in the construction industry and only 3.82% in the non-construction industry. As a result, actual labor costs vary widely from industry to industry, even within the same state.
3. Company Size
Companies face different cost structures due to their size. Large companies can usually offer their employees higher salaries than small companies. Higher salaries often help reduce turnover and lower hiring and onboarding costs in the long run.
In competitive markets, it can be difficult for a small company to match wages with a larger company and there can be higher turnover, leading to higher start-up costs over time.
Also, payroll costs are typically lower for a large company, as it is generally cheaper per employee to manage payroll for 5,000 employees than for 20 employees. At the same time, larger companies face higher overheads and hidden costs such as rent and equipment expenses.
4. Market Conditions
The cost of hiring an employee also depends on market conditions. In an employer-centric market, the cost of attracting the best talent can be lower than in an employee-centric market. However, in an employee-centric market, companies need to offer more competitive and generous salaries.employee benefit packagesattract and retain the best talent.
5. Unions
Workers who are members of a union can cost more than workers without a union. Employers are subject to the minimum wage threshold set by the workers' union, which is usually higher than the minimum wage for non-union workers.
Union wages can also affect employers who do not hire unionized workers: if employers operate in a unionized industry, they may need to offer higher wages to compete for top talent.
6. Turnover rate
Companies with high turnover rates use resources to hire and onboard multiple employees over time. Recruitment and onboarding costs vary by hiring strategy, but may include job posting fees, recruiting software, background checks, and the time and resources your HR team devotes to filling each vacancy.
Read on for helpful strategies to reduce employee turnover, such as: For example, offering personalized benefit packages to boost employee morale.
7. Roles and Responsibilities
Experienced workers typically earn more than inexperienced workers. In a competitive market, an employee who can demonstrate that he or she has the exceptional skills and experience required for a position will generally receive a higher salary.
Over time, employers often provide additional benefits for employees to stay with the company. Older employees may receive more comprehensive benefit packages than entry-level and middle-level employees, impacting the employee's overall costs.
8. Performance
The more productive your employees are, the more resources they save for you. Low employee productivity costs you more resources in the short term and increases your turnover rate. Companies can offer benefits such as performance bonuses, career development funds, and additional paid time off to motivate employees and increase productivity.
Many strategies companies use to reduce labor costs can result in higher costs elsewhere. For example, offering performance-based rewards comes at an additional cost, but can increase employee productivity and reduce turnover over the long term.
How to calculate the cost of an employee
Personnel costs vary greatly depending on the above variables. Payroll taxes, benefits and other expenses continue to riseworkload of the employer, so it is more difficult to do an accurate calculation yourself.
Below is general guidance on how to calculate mandatory annual employee expenses on top of base salary.
1. Determine the employee's gross annual salary
First, request your employee's gross annual salary before taxes are deducted. In the example below, an employee in Quebec, Canada receives a gross annual salary of C$60,000.
2. Calculate payroll taxes
Then calculate the total annual payroll tax you have to pay for your employee. In Quebec, this includes several federal regulations as well as two provincial regulations that apply only to Quebec workers: labor regulations and parental leave benefits.
3. Add any additional expenses
Add up the total cost of any additional annual expenses associated with the employee, such as: B. Ancillary services, training costs and work equipment.
Some of these expenses, such as B. Office rent and company holidays are group expenses. To get the total cost of group expenses per employee, add up the group expenses and divide by the total number of employees. Add this number to your other additional employee expenses.
In summary, add up the employee's gross annual salary, annual payroll taxes, and total annual incidental expenses to get the employee's total annual expenses. You can further divide this by months or hours to find the employee's total hourly or monthly cost.
8 Expenses to consider when calculating staff costs
Employers must consider a long list of expenses in the above calculations, many of which can easily be ignored. Below are eight critical expenses to consider when accurately calculating staff costs.
1. Recruitment Costs
During the hiring process, companies face significant costs in the form of job posting fees, applicant tracking software (ATS) subscriptions, and the time, energy, and resources that the hiring team devotes to filling each vacancy.
If you outsource your recruitment needs to an outside partner, you may be required to pay a commission or advance of 15% to 30% of base salary for each position you fill.
2. Incorporation Costs
duration of integration90 diaOn average, it can take up to a year for an employee to reach their full potential. During this time, companies must expect various start-up costs, such as:
- paperwork.Human resources spends time and resources completing and submitting paperwork for a new hire.
- Set up workspace.Some companies offer2.000 US-Dollarto help new remote workers set up their home office.
- travel and relocate.This includes airline tickets for the employee and their family and accommodation upon arrival.
- Training and support of employees.Employees spend time and resources training and supervising the new employee's day-to-day work.
Helping a new hire transition into their role lays the foundation for their future at your company. It's worth noting that effective onboarding, when done right, can dramatically improve retention rates and reduce employee costs in the long run.
3. Compensation
An employee's salary, or base salary, is the biggest cost to your business. It's also one of the easiest costs to measure. Salary or salary depends on several factors such as: B. your role, your years of experience and the market demand for talent with your skills.
In addition, employees are protected by minimum wage laws in their jurisdiction. Employers must ensure their compensation strategy complies with the labor laws of the countries where they hire talent and that it is fair, consistent and competitive.
Accordinglypicodi, the national net monthly minimum wage for full-time employees in Australia was more than 10 times the monthly minimum wage in Brazil in 2022:
Monthly minimum wage by country in 2022
(salaries converted to USD)
4. Legal Benefits
Statutory benefits vary by country and state and can account for a significant portion of actual employee costs. For example, Mexican labor law entitles workers to annual vacation pay equal to 15 paydays. However, Spanish labor law entitles you to two annual bonuses of one month's salary each.
Other statutory benefits may include health insurance, employee compensation, and a pension fund.
Learn more:What are the legal benefits?
5. Additional Services
Fringe benefits are additional benefits that employers offer employees over and above the legal minimum. Although not required by law, offering benefits is a useful way for employers to attract and retain talent and improve retention in competitive markets.
Benefits vary by location and are primarily at the discretion of the employer. For example, German law does not require an annual holiday allowance, but many employers offer it anyway.
Supplementary benefits can also come in the form of health insurance, dental and eye protection, old-age provision or paternity leave.
Learn more:What are additional services?
6. Taxes
Taxes vary greatly between countries and states. For example, the unemployment insurance tax rate for new employers in Pennsylvania is 3.82% or 10.59%, depending on the industry. In Florida, however, the unemployment rate for all new employers is 2.7%.
In principle, employers must make contributions to various federal or state funds for each employee, such as unemployment insurance, workers' compensation insurance and health insurance.
7. General Expenses
All businesses in all industries face overhead costs. These are the basic, necessary amenities and services you need to enable your employees to go about their daily tasks and keep your business running.
Overheads vary depending on the type of business you run, but the following are some of the most common costs:
- Rental of office space.Rental costs vary depending on the size and needs of your team.
- Public Utilities.Incidental charges include charges for heating, water, electricity or fuel for company cars.
- office supplies.Accessories include laptops, monitors, software, pens, paper, and other tools your team needs to get tasks done.
- company uniforms.Uniform costs vary greatly by industry.
Many of these costs depend on the total number of employees in your company. Expanding your team beyond a certain threshold may require more office space and higher rents, affecting your overall cost per employee.
8. Hidden costs
When calculating personnel costs, you can easily overlook the costs for meetings, further training, seminars and company retreats. Your team size also affects these hidden costs; As your team grows, meetings take longer and retreats become more expensive.
4 ways to reduce labor costs
Offering remote work, creating a distributed workforce, streamlining global payroll, and offering more attractive benefits packages to employees are all highly effective ways to reduce employee costs.
1. Offer remote work
Some employers report annual savings of thousands of dollars per employee by letting them work from home two or three days a week. if the staffhomework, employers can eliminate or reduce many overheads associated with onsite workers, such as B. Rent, utilities and office supplies.
Consider the following stats fromGlobal Workplace Analysis:
Remote workers also experience higher productivity and less absenteeism, which improves employee retention and lowers long-term employee costs.
2. Create a distributed workforce
As remote work becomes more popular around the world, more and more companies are starting to do itHire talent worldwide. Recruiting in overseas markets allows employers to tap into a larger talent pool and easily find candidates with the skills needed at a price that fits their budget.
With a distributed workforce, employers also reduce overheads such as rent, utilities, and office supplies, and benefit from increased productivity and employee retention.
If you're looking to build a distributed workforce, consider partnering with a Registered Global Employer (EoR). An EoR simplifies the entire global recruiting process by handling onboarding, compliance, payroll, and benefits management so you can easily build and manage teams across borders.
Learn more:What is a registered employer?
3. Optimize payroll
Streamlining payroll is an effective way to reduce staffing costs, especially for global companies in needpay international employeesand browse in multiple currencies and languages.
A global payroll solution streamlines all payroll operations on one centralized platform and offers many benefits such as:
- accuracy and cost savings.Reduce costs and eliminate errors by automating payroll.
- Conformity.Enjoy peace of mind that your payroll processes comply with local labor laws.
- Consistency.Retain the best talent by making timely and accurate payments in any market around the world.
- efficiency.Save time and relieve stress by using one central platform instead of multiple providers.
A global payroll solution cuts costs and does all the heavy lifting, so you can spend more time focusing on your daily tasks and goals.
Learn more:What is Global Payroll?
4. Improve talent retention with competitive advantage
The ongoing recruiting and onboarding costs due to the high turnover are significant. One of the most critical factors that HR teams ignore when attempting to improve retention rates is overall employee benefits packages.
By offering competitive, locally tailored benefits packages, you show talent that you care about their well-being and drastically reduce staff turnover.
To really move the needle, a comprehensive employee benefits package needs to go beyond statutory benefits and include things like supplemental health insurance, wellness programs, employee assistance programs, or discounts on products and services.
Get the guide:How to retain talent with global employee benefits
Any of the above strategies can drastically reduce staffing costs. However, employers who make these calculations and implement these strategies can face financial and legal problems if they are unsure of the compliance risks.
The risks of inaccurate personnel cost payments
Accurately calculating employee cost payments is necessary to make informed financial decisions, regardless of the size or industry of your business. Employers who work alone or with a dishonest partner risk hefty fines for non-compliance and possible overpayments.
violation
Providing inaccurate cost contributions related to statutory employee benefits leads to large fines, legal fees, lost business opportunities and reputational damage. The risk of non-compliance is even greater for organizations with a distributed workforce that must navigate complex labor laws in multiple countries.
The best way to eliminate compliance risk is to partner with an EoR. However, it is essentialChoose a reliable EoR partnerwhich accurately calculates the burden on the employer and does not increase the cost in order to make a profit.
overpayments
Trust is key in your relationship with an EoR. If you are expanding into a new market, an EoR will be on hand to provide cost estimates such as employer fees and local Value Added Tax (VAT). Employers who choose to work with an EoR must ensure that theirThe EoR partner provides accurate quotes.
Some EoRs even increase employer billing and VAT rates on profits, underscoring the need to take the time to find a diligent and honest EoR partner.
Hire with confidence and at an affordable price with Velocity Global
Calculating actual labor costs is daunting, especially when you operate in multiple foreign markets. Partnering with a verified EoR like Velocity Global takes the guesswork and risk out of these calculations.
Velocity Global provides employers worldwide with transparent and accurate shipping prices with a 99.63% accuracy rate. Our internal and external verification teams follow a rigorous process to collect, verify, update and maintain load estimates even as country conditions change.
our worldRecord Employer Solution (EoR)handles onboarding, benefits, compliance and HR support so you can focus on attracting the best talent from around the world. In addition, our integrated systemGlobal payroll solutionmakes paying international employees easy and risk-free.
By partnering with Velocity Global, you can quickly and affordably build remote teams in over 185 countries.
contact us todayto learn how to hire and pay according to your global HR standards to ensure accurate payroll accounting.
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