What are labor costs?
Labor costs refer to the sum of the wages paid to employees. It includes monetary compensation for the actual work and other expenses incurred by the employer in relation to the employee. These additional expenses that add up to form the labor cost include:
- Training costs.
- Health care
- Payroll taxes
- Sick days
- Vacation days
Labor costs are usually divided into direct and overhead or indirect costs. It is easy to calculate the direct labor cost by taking into account the total wages paid to employees who are directly involved in production. On the other hand, indirect costs or employee overhead costs include the wages paid to employees who work in labor and production.
You can also classify labor costs as fixed or variable costs. Fixed labor costs are associated with long-term expenses that are unlikely to change, like the wages of employees who have signed long-term contracts. On the other hand, variable costs are subjected to change based on a certain factor. For example, labor costs associated with operating machinery can vary based on the factory’s output and hence it is a variable cost.
What are training costs?
Training costs include all direct and indirect costs related to the resources and materials required to design, develop, execute and maintain an employee training or upskilling program. Making a training budget plan will help you build a cost-effective program with measurable goals and objectives. Improper training can cause employees to make mistakes or eventual turnover, so you have to focus on quality over quantity. The average company in the United States spent $1,111 on training an employee in 2020.
How to calculate labor cost?
As an employer, it is essential to calculate your labor cost beforehand so you can set up your budget accordingly.
Wondering how do you calculate the cost of an employee? This employee cost calculator will help you calculate the labor costs accurately.
1. Find Gross Pay
To begin with, you have to calculate the gross hours worked by your employees every year. You can multiply it by the average number of weeks in a year or 52 to obtain the gross hours per year. To complete the calculation, you have to take their hourly pay or pay rate into account. Therefore,
Gross hours per year = Gross hours per week * 52.
Gross pay = Pay rate * Gross hours
2. Evaluate the net hours worked in a year
If you want to calculate the actual number of hours worked by an employee in a year, you have to be aware of how many days they were absent. In case you want to use the labor cost calculation for a future employee, the current staff’s average number will guide you. You will get the yearly days of absence quickly by multiplying the number of days absent by the daily working hours. Now, you can calculate the net hours worked by using the following formula:
Net hours worked = Gross hours – Hours not worked
3. Sum additional annual costs
If you want this employee cost calculator 2021 to be accurate, you have to take into account all the expenses associated with employment. To compute other annual costs, you have to add costs related to taxes, overtime, benefits, insurance and supplies.
4. Annual payroll labor cost
How much does an employee really cost? This step will give you the answer via the main labor cost formula.
Annual payroll labor cost = Gross pay + other annual costs
5. Actual hourly labor cost
If you want to take the calculation further, you can compute the actual hourly labor cost by dividing the Annual payroll labor cost by the number of hours worked by the employee.
Actual hourly labor cost = Annual payroll labor cost / Net hours worked
6. Estimated Labor cost percentage
To understand what is the fully loaded cost of an employee, you can find out the labor cost percentage. It refers to the relationship between the total revenue in a certain period and the labor cost. The formula used to calculate the labor cost percentage formula is as follows:
Labor cost percentage = Annual payroll labor cost / Total revenue
The ideal labor cost percentage varies from industry to industry.
How to reduce labor costs?
Paying competitive wages to your employees is essential for employee retention and productivity. However, you can reduce labor costs in other ways like training employees cost-effectively, onboarding them properly, avoiding rehiring costs by lowering turnover and more. Efficient and motivated employees will increase your profits and reduce labor costs simultaneously.
The following strategies will help you reduce labor costs:
1. Well-planned onboarding
A structured onboarding program will save you the cost of inefficient and untrained employees who cannot do their job well. By training your employees properly right from the beginning, you can ensure that they have the necessary skills to fulfill their duties. The onboarding process should continue beyond the first three months so that employees can be fully integrated into the work culture over an extended period.
Moreover, proper onboarding can prevent new hires from quitting in the first few months. Glassdoor found that great employee onboarding can boost new hire retention by 82%, which will help you avoid rehiring costs. On the other hand, a negative onboarding experience can make new hires twice as likely to search for new job opportunities as per Digitate.
2. Reduce training costs
Companies want to broaden their scope of training, invest in new technologies and equipment and increase training program effectiveness in the coming years. To reduce training costs in the long run, it is important to take advantage of modern technologies that have made digital learning cost-effective and efficient. In 2020, the usage of blended learning techniques rose to 33%, and the popularity of virtual classroom learning went up to 23% due to the pandemic, which reduced the cost of in-person training.
3. Video training for deskless employees
With the pandemic reinforcing the potential of remote workers, organizations will hire more deskless employees in the next few years. Video learning is one of the most cost-effective and efficient learning tools of the modern workplace. Over 85% of large companies were already using virtual classrooms, webcasting, and video broadcasting in 2019 according to Training Magazine.
Visually engaging short videos prompt more employees to participate in the training and allow for microlearning. Remote employees all over the world receive consistent training, and they have unrestricted access to the modules. A video training solution like Bites is a great place to start. All you need is a mobile phone – no expensive equipment or editing tools required! Within minutes you’ll be able to create training videos, share with your team via instant messenger apps, and monitor progress.
4. Reduce employee turnover
The Society for Human Resource Management (SHRM) finds that the average replacement cost of a salaried employee is six to nine months’ salary. This is a significant expense to incur every time an employee quits. Apart from the steep rehiring costs, you also have to consider the cost of vacancy, the loss of morale and productivity and the wastage of training resources. The best way to avoid this expense is to make an employee retention plan and follow effective retention techniques to reduce turnover altogether.
Bites is a virtual microlearning solution for employees of all industries. You can record and edit short video modules on different training subjects and share them directly with your employees via Bites.
Video learning boosts employee engagement and allows the learners to consume knowledge in small, digestible chunks. You can track employee performance via the analytics dashboard and know immediately if someone is slacking. Bites also encourages learners to leave their feedback so that you can make necessary improvements.