APU Business Original

Understanding the True Business Costs of a Workforce

By Dr. Gary L. Deel, Ph.D., J.D.
Faculty Member, Wallace E. Boston School of Business

Many businesses look at labor costs purely in terms of payroll and associated expenses. But beneath the surface of any workforce, there are a plethora of underlying business costs that must be considered in the total equation for assessing profit and loss in the context of human capital.

Certainly, payroll costs must be considered. For instance, there are the direct wages paid to each employee, as well as Social Security and Medicare taxes that must be withheld out of gross wages.

Additionally, there is federal income tax, which will vary based on each employee’s W-4 withholding elections usually made at the time of hiring. Incidentally, these withholding elections should be updated periodically, as each employee’s life circumstances may change over time (for instance, other income, marital status or the number of dependents to be claimed).

But even these basic payroll costs are not really as simple as they might seem. For example, think about how frequently payroll is processed. Most employers run a biweekly payroll (processing once every two weeks). But consider how running payroll more or less frequently would change business costs.

If a business owner runs payroll weekly, that will be twice the work as compared with a biweekly schedule, so the payroll team has twice the amount of processing to handle. They might consequently need more staff or more hours to get the same job done.

On the other hand, I once worked for an employer that ran payroll monthly. That strategy resulted in substantially reduced payroll processing costs.

Employee Payment Frequency Can Vary, But Is Generally Biweekly

As it turns out, there are no federal regulations around how frequently a business must pay its employees, although some states have implemented their own parameters. The only federal requirement on payroll schedules is that it be consistent, so an employer cannot continuously change the interval from one period to the next.

If your business operates in a state with no restrictions, you could, in theory, pay your employees as infrequently as once per year, so long as you were consistent with this interval. But good luck in finding employees who would be willing to accept these kinds of payroll terms, because employees obviously need more frequent pay to cover bills for rent, food, gas and other normal expenses of daily living. In recent years, the biweekly schedule has emerged as the most popular balance of interests between employer and employees.

Staffing Strategies and Paying for Overtime

There are also staffing strategies to consider in a business as well. For example, if a business experiences a significant increase in its workload, business owners could either pay the existing workforce overtime to meet customer demands or hire more employees. Both strategies come with additional cost considerations and every situation is different, so companies must assess each circumstance individually to determine the best direction.

With regard to overtime, there are also strategy deliberations to be conducted over whether certain employees should be salaried versus hourly and therefore eligible for overtime pay. Obviously, there are federal- and state-level laws that govern a lot about which workers must be paid hourly and subject to overtime.

Strictly speaking, there are no requirements under the law that any employees must be salaried. But there are often cost advantages commensurate with salaried workers. So where an employee could be legally statused as exempt (i.e., salaried), employers must conduct careful analyses to ensure that these decisions make good fiscal sense.

Additional Business Costs

In addition to direct payroll and staffing considerations, many businesses have other business costs relating to the workforce. For example, if your company has more than 50 employees, it is federally mandated to provide subsidized health insurance options pursuant to the Affordable Care Act. Even if a company has fewer than 50 employees, it may choose to offer healthcare benefits as a matter of competitive advantage in recruitment.

Other fringe benefits include pensions, 401(k) accounts, other retirement programs, stock options and tuition reimbursement plans. There may also be childcare services, meal provisions, company vehicles and a wide variety of other perks that come at a cost to the employer.

Paid breaks, paid lunches and paid vacations must also be considered in total employee costs. These are all times for which employees receive the employer’s money, but for which there is usually no business productivity.

Additionally, certain employers may be subject to mandatory Family and Medical Leave Act (FMLA) benefits for employees. At present, the time off that must be afforded to eligible employees under FMLA is unpaid (which, incidentally, means the United States is lagging embarrassingly far behind the majority of the modern developed world in terms of employee paid leave protections). However, even unpaid FMLA benefits have an indirect cost to employers in terms of claims processing and the management of workloads around employees who must, by law, be permitted to return to their jobs after their qualified leave has ended.

Furthermore, there are tremendous costs related to the recruitment and training of competent, reliable human capital. This work includes:

  • Writing and publishing job advertisements online and in print
  • Reviewing applications
  • Filtering candidates
  • Conducting interviews
  • Running background checks
  • Processing hiring paperwork
  • Facilitating company onboarding
  • Coordinating on-the-job training

Optimizing the circumstances of the workplace to minimize employee turnover is an important factor in workforce cost assessment. For example, reducing wages might save a company money upfront in terms of payroll. But if employees are dissatisfied with their compensation enough that they frequently leave to find higher-paying jobs elsewhere, then the payroll savings of lower wages could be more than offset by the amount of increased turnover and constant new hiring that a business must maintain just to keep a steady supply of new employees in the business.

The same is true with respect to worker satisfaction, which, interestingly, can actually be affected more by factors like company culture than by wages. Consequently, a company might need to spend money on things like work-life balance and wellness initiatives for employees to ensure the workforce is happy with their jobs. But if these expenses result in substantial reductions in turnover, then they might very well pay for themselves two or three times over in the long run.

Ensuring Employee Satisfaction

Sometimes unhappy employees don’t leave an organization, but they also don’t perform at their best either because they feel a lack of motivation and loyalty. Such employees often “loaf” around the workplace, collecting a paycheck but doing just the bare minimum necessary to keep their jobs and avoid termination for performance issues.

This employee dissatisfaction can also be a significant cost to a business in terms of suboptimal productivity. Focusing on improving corporate culture and employee morale can go a very long way toward reducing idleness and encouraging employees to put a sincere effort behind their work duties every day.

Workforce Cost Assessment Requires Looking Beyond the Surface

Ultimately, workforce cost assessment is far more complex than it might seem at first. If business leaders are serious about understanding the total costs of their human capital and how a business can maximize its return on investment with its employees, it would be wise to first look at the big picture and examine all of the incidental costs related to labor.

Dr. Gary Deel is an Associate Professor with the Wallace E. Boston School of Business. He holds a J.D. in Law and a Ph.D. in Hospitality/Business Management. Gary teaches human resources and employment law classes for the University, the University of Central Florida, Colorado State University and others.

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