How much does an employee cost?

The cost of employing someone is more than just their wages or salary, but how much does it cost to hire an employee when every factor is included? This article discusses all the possible cost items and provides guidance on how and when to calculate them.

Direct employee costs

Direct costs are easy to calculate. Basically, they are the employee’s base wages or salary, plus all cash payments on top. These payments may include:

• overtime and other penalty rates
• shift loadings
• cash allowances
• bonuses and commissions
• leave payments, for example sick leave or annual leave (note a loading may be payable on annual leave payments)
• any other form of cash payment.

Indirect employee costs

There are two categories of indirect costs:

• cost of items that provide a benefit to the individual employee
• cost of items that are a part of running a business and a consequence of having employees.

Common benefits include:

• cars
• loans
• travel
• free or discounted products and services
• parking
• insurance
• health insurance payment or contributions
• mobile phones
• laptops or other computers
• education expenses
• shares
• professional memberships
• accommodation.

Superannuation is also a benefit but is discussed separately below.

You need to calculate both the cost of providing a benefit to an employee and the value of the benefit to the employee. For example, when a company car is provided, private use of the car will be a benefit to an employee, but when it is used for work purposes that will be an operating cost for an employer. When calculating employment costs for each employee, you need to add the Fringe Benefits Tax that applies to the value of the benefit to the employee.

The value of superannuation contributions should also be counted as an indirect cost because they are paid directly to a fund rather than as cash to an employee. Superannuation contributions are compulsory, and if they are not paid an employer must pay the superannuation guarantee charge. The SG charge should be added to indirect costs as well.

Other employee costs

Finally, there are costs employers must pay regarding having employees at the workplace. The most common of these are workers compensation premiums and payroll tax.

Workers compensation premiums vary quite widely according to the industry and type of employment, as well as the employer’s history. Payroll tax is a state tax and typically does not apply to small businesses, but the rates vary from state to state. Therefore, it is not possible to quote 'standard' rates for either of these costs.

Employee costs: key terms explained

There are several terms used by remuneration specialists to describe various calculation methods. The following are the main calculation methods:

• Base salary and wages: simply the standard rate payable to employees without any 'extras'. For ease of calculation, it is usually expressed as an annual amount.
• Total Remuneration: base salary and wages plus the other direct costs (overtime, allowances, leave loading, etc) and the value to the employee of fringe benefits.
• Total Employment Cost: Total Remuneration plus FBT payable on the benefits. Also referred to as Total Remuneration Package, and widely used in remuneration benchmarking surveys.
• Total Employee Reward: Total Employment Cost plus other short-term incentive and bonus payments.
• Total Target Reward: Total Employment Cost plus longer-term (at least annual) incentive and bonus payments.

Note: none of the above definitions includes items such as workers compensation premiums, payroll tax or SG charge payments, so they don’t measure the full cost of having employees.

Another frequently used term is 'on-costs'. This divides employment costs into two components:

1. base salary and wages, plus

2. on-costs, which basically refers to everything else.

When studying data in remuneration surveys, it is important to be aware exactly which calculation method the survey has used, then use the same method if you want to benchmark your own results against the data.

Calculating the total cost of an employee

To calculate the total cost of employing an employee, add all the following items together:

• base salary and wages
• other direct cash payments such as penalty rates, leave loading, allowances, etc, but don’t double count basic leave payments — these are simply payment of normal salary/wages that would be made in any case, whether the employee is at work or not
• cash value of employee benefits provided to the employee, including superannuation contributions
• FBT payable on these benefits
• value of any incentive and bonus payments
• workers compensation premium (per employee)
• payroll tax (per employee)
• SG charge, where payable
• other miscellaneous costs such as cost of training courses.

It’s typical to omit the cost of items such as employee uniforms and office equipment, because these items are regarded as tax-deductible business expenses.