Knowledge Base - Labor

Effective Labor Rate Calculation

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:

  • Quoting
  • Job Cost
  • Benefit Administration
  • Compensation Plans
  • Benchmarking

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:

  • Hourly Base Pay Rate –  from the payroll system. The actual straight time rate paid to the employee.
  • Paid Time Off  – often referred to as PTO. This would include vacation, holiday, sick, funeral or bereavement, jury duty, personal time, etc. In some businesses, mandated training or recertification time would be included as it is not time directly related to the production of revenue.
  • Health Insurance – from your monthly invoice. If you are averaging a group of employees, pay attention to the mix between levels of coverage like single vs. family. If you are self insured, your COBRA rate is an approximation of your cost per employee.
  • Other Insurances – similar to health insurance, the actual rates for dental, disability and any other insurance coverage will need to be determined.
  • Workers Compensation – from the policy, you can determine the rate for each class of employee. You may want to increase or decrease the base rate to take into consideration your unique experience modification, discounts and refunds.
  • Employer Retirement Plan Contribution – depending on the type of plan, this might take the form of a percentage match or an annual fixed dollar contribution.
  • Payroll Taxes – determine the employer’s share of FICA (6.2%), Medicare (1.45%), Federal Unemployment  (0.8 ) and State Unemployment (varies based on experience). Your rate is shown on your quarterly U/C Return.
  • Other Costs – uniforms, employer sponsored lunch, education reimbursement, etc.

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.