By Dr. Gary L. Deel, Ph.D., J.D.
Associate Professor, Dr. Wallace E. Boston School of Business
In a previous article, I wrote about some of the cost considerations within workforces as a whole. That article covered a lot of macro-level variables to total workforce expenses.
But here’s a different, yet no less interesting question: How much do you, an individual employee, actually cost your employer at the end of the day? As with workforces in general, there is a lot to consider here. Sure, there is your basic salary or hourly rate, but that is not all there is to paying an employee.
The Cost of Paid Time Off
For the sake of a neat, tidy example in this article, let’s assume that you work a full-time job, and your hourly rate is $10. Let’s also assume that you take advantage of all employee benefits available to you, such as time off, retirement programs and fringe benefits. Finally, let’s assume that your employer is large enough to be subject to all federal labor laws for wages and benefits, including the Fair Labor Standards Act, the Affordable Care Act, and so on.
The first thing to understand is that your $10 per hour rate is just your base earnings contingent upon the hours you work. But we must remember that you won’t be working every single workday of the year. Naturally, you will have time off for several reasons, including holidays, vacation and sick time.
There are 11 federal holidays per year. Employers are not legally required to give holidays off, though most do. Obviously, not all holidays will fall on a normal workday. However, even when they fall on a weekend, most employers give employees an adjacent workday off in observation of the holiday, so the time off generally becomes 11 days in total either way.
The average paid vacation time off in the United States is currently 10 days per year. This time is exclusive of holidays and sick time.
In terms of sick time, the U.S. Department of Labor reports that private-sector workers receive on average between seven and nine paid sick days per year, depending on length of service and other factors. We’ll use the middle number, eight days, for the sake of our calculation.
So in total, we have 11 holidays, 10 vacation days and eight sick days – all paid time. This amount is 29 days – or nearly an entire month – for which your employer will likely pay you but receive no productivity. Again, this example assumes that you will use all your vacation time and sick time throughout the year.
As a result, saying you make $10 per working hour is not really accurate. But to correct this figure, we must look at the actual number of working hours after deducting the paid time.
The typical full-time work year consists of 2,080 work hours (40 hours per week x 52 weeks per year = 2,080). If you make $10 per hour and work 2,080 hours per year, then your annual salary is $20,800 ($10 per hour x 2,080 = $20,800).
But remember that you have on average 29 days – or 232 hours (at eight hours per day) – of paid time off. So if you take advantage of all your available paid time off, then you are not actually working 2,080 hours in a year. Instead, you are working 1,848 hours (2,080 total hours – 232 hours off).
Now if you divide your total annual salary ($20,800) by your net working hours (1,848), you are not actually making $10 per hour. Instead, you are making $20,800 / 1,848 = $11.26 per hour. That’s a 12.6% additional cost to employers – just in paid time alone.
Related link: Workforce Compensation: Why Everything Boils Down to Time
Contributions and Other Administrative Costs for Your Employer
In addition to your paid time off, there are the Federal Insurance Contributions Act (FICA) payments – including Social Security and Medicare – that must be made in every employee paycheck. Both employers and employees have to pay an equal portion into these social benefits every pay period.
The amount that the employer and employee each have to pay for Social Security is 6.2%, and the amount that each have to pay for Medicare is 1.45%. Consequently, your employer must pay 7.65% above and beyond your pay to these government programs (and so do you). Adding that amount to your hourly rate, you are now at $12.03 per hour – a full 20% beyond your base hourly rate.
Then there are other administrative costs. For example, workers’ compensation insurance generally costs about 1% on employee payroll expenses. Unemployment insurance costs an average of 0.75% on payroll. Short-term disability and long-term disability insurance coverage (often collectively referred to as income replacement plans) cost about 1-3%per each employee. Let’s take the middle number at 2% for each employee and assume a 4% total cost here.
So combining worker’s compensation, unemployment and disability insurances adds another 5.75% to the total costs for your employer. Now you are at $12.61 per hour – with costs exceeding 25% beyond your base earnings.
Related link: How to Make Strategic Decisions about Employee Pay
The Cost of Providing Health Insurance and Retirement Programs
One of the biggest costs for all employers who are mandated to offer it is health insurance. The Affordable Care Act requires that all employers with 50 or more employees provide subsidized health insurance to their workers.
According to the Bureau of Labor Statistics (BLS), the average cost per employee-hour worked in 2020 was $2.64. When we add this amount to your total, you are now at $15.25 per hour, with costs exceeding 50% of your base earnings.
Next, there are retirement programs, which can include 401(k) plans, individual retirement accounts (IRAs) and pensions. However, pensions are less popular today than they were decades ago; they have largely been phased out due to cost considerations as retirees are living longer and longer.
Retirement plans often involve a “matching” component where employers offer to contribute a certain percentage of employee salary to the account if the employee agrees to do the same. This “matching” percentage varies from plan to plan, but the average is roughly 2-6%.
We can again use the middle number here and assume an average contribution on retirement plans of 4%. Adding this amount to your total, you are now at $15.65 per hour – with costs approaching 60% of base earnings.
It’s important to note that many retirement programs also have management or maintenance fees shared by employers and employees, which are above and beyond the direct contributions. Those fees can vary between 0.5-2%, depending on the provider, the fee structure, and the split on fee sharing between employer and employee. But we will ignore them here for the sake of a simpler calculation.
Other Benefit Expenses Involving Your Employer
There are other potential employee benefits that can add costs to an employer, such as:
- Daycare and childcare services
- Dry cleaning and laundry services
- Company vehicles
- Stock purchase plans
- Leisure and recreation facilities
- Employee discount programs
The average costs associated with these benefits is more difficult to pin down because offerings range much more widely across employers. So we will ignore these costs as well.
So the total at the end of this review – $15.65 per hour – reflects a total non-salary employee cost of 56.5% for employers. In March of 2022, the BLS reported that non-wage employee benefits accounted for roughly 42% of total employee compensation. So our calculation based upon various industry reports and independent survey data may be a bit on the high side.
But even if we were to split the difference, we’d be looking at an employer cost to maintain employees that is more than half of an employee’s salary. Ultimately, all of the expenses related to employees reinforce the premise that employers must take great care to make smart decisions with respect to compensation and workforce management.
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