Maintaining an up-to-date analysis of effective labor rates for different categories of employees in your business is an important tool. It can be used to monitor the labor cost used for:
While this tool has always been important, we believe having this information will become more critical because of the unknown impact on employee costs of health care reform.. The Concept: To calculate your Effective Labor Rate, you accumulate for a year all of the costs that go along with the pay rate including benefits, taxes and insurances and divide by the actual hours worked. This can be done by individual employees or on an average basis for a group or class of employees. The Components of the Effective Labor Rate:
How overtime is incorporated in an Effective Labor Rate Calculation will vary from company to company. When calculating overtime costs, only the hourly rate paid an employee ( typically time and a half ) plus payroll taxes, workers compensation and retirement plan match are considered. All other benefits are already absorbed in the straight time rate. Often the overtime cost approximates the fully loaded straight time cost, but, depending upon your individual circumstances it may be more cost effective to work OT than hire new employees, or vice versa. Click here for a calculation for an employee making $18.00 per hour.
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