What is employee cost and how do you minimise it?
What is employee cost?
Employee cost is the total cost of maintaining a team member on your payroll, which includes employee wages, superannuation, benefits, training, commissions, mandatory insurances and payroll taxes.
Companies should consider employee cost when hiring and budgeting, especially since the total amount goes well beyond the clear-cut and obvious cost of employee salaries. Employee cost calculators can run the numbers for your business.
How much does an employee cost?
Compensation
Team member compensation is one of the most significant factors in employee cost.
Compensation includes:
base salary or hourly pay rate
overtime pay
commissions
bonuses
payroll tax
superannuation.
In Australia, the national minimum wage is currently $882.80 per week for a 38-hour work week or $23.23 per hour. This is the pre-tax amount for the employee and does not constitute the full cost of their employment to their employer.
The superannuation guarantee also forms part of an employee’s package. This is the minimum amount employers must pay to the employee’s chosen super fund to avoid having to pay the super guarantee charge. The superannuation guarantee is currently 11% of an employee’s ordinary salary, regardless of how much the employee earns.
Insurance
There are a few crucial types of insurance and others that businesses may offer employees as part of their benefits packages. They include:
worker’s compensation insurance, which is compulsory for all employers across Australia.
disability insurance, which pays insured employees a flat fee based on their previous earnings if they become disabled and can’t work
life insurance, which pays a lump sum to the beneficiaries of an insured employee’s plan in case of their death
health insurance, which may cover costs that Medicare doesn’t or allow for treatment in a hospital setting as a private patient
Leave
All employees (except casual employees) are entitled to leave based on the number of years they’ve worked with a company.
In Australia, the current leave requirements are:
4 weeks of paid annual leave for every year of service
10 days of paid personal sick or carer’s leave
2 days of unpaid carer’s leave (if needed)
2 days of paid compassionate leave (if needed)
a day off for public holidays (subject to reasonable requests to work)
unpaid parental leave when a child is born or adopted.
Recruitment
Recruiting costs are those associated with filling open positions. They apply to both internal and external candidates, and may include the following:
job advertising costs
recruitment agency fees
costs of recruiting internally
referral fees if internal employees refer someone
reimbursement for candidates’ interview-related travel expenses
screening tests
relocation allowances.
Recruiting a new team member costs $5,000 on average.
Training
Companies often overlook the expenses associated with training both new and existing team members, but it’s an important factor in employee cost.
All new team members go through a learning and development and/or training period. Existing team members also need ongoing training to maintain their skills, learn new technology and adapt to changes within the company.
Training costs approximately 1.5% of an employee’s salary annually.
Equipment
As your workforce grows, equipment costs increase. Each new employee may need a laptop, for example, along with a chair, desk and headset. Remote workers may also need hardware and supplies to perform their roles offsite.
Common variables affecting employee cost
Education
Individuals with strong education or experience typically earn higher salaries, which increases employee costs. High-earning workers may also have a benefits package and bonus structure that raises costs for their employer.
Employee turnover rates
Businesses and industries that have higher turnover rates experience higher recruiting and training costs than those with higher retention rates. With high turnover, you may also see a drop off in team productivity, because new employees won’t hit peak productivity until they’ve been on the job for a few months at least.
Industry
Every industry has its own standard of norms. Some industries, for example, require companies to have paid health insurance, while others may only expect this benefit for top talent, or not at all. Equipment costs per employee also vary significantly by industry.
Job function
More experienced employees often require higher salaries than those who are inexperienced, or who may not possess rare skills. The specific role each employee has will impact their individual employee cost.
Location
Employee costs may vary based on the cost of living in the city of operation.
Market
The current job market impacts your employee costs. For example, in a tight labour market you may have to pay more to attract potential employees to your company.
Unions
Unionised employees often earn more than non-union workers because of the collective bargaining power that they have. Even if you don’t hire unionised workers, union influence can drive salaries upward more broadly.
Performance
Many employers offer bonuses to high-performing team members. And while bonuses are an expense, they can also improve employee satisfaction and drive better performance and higher productivity.
5 ways to reduce employee costs
1. Hire remote workers
Remote work has boomed in recent years. Hiring remote workers reduces a large number of overhead costs, including rent, office supplies and utilities, saving thousands of dollars annually per employee.
With up to 65% of people wanting the option for remote work, this approach is a very cost-effective way to attract and retain top talent.
2. Automate payroll and other business processes
Automation goes a long way in increasing productivity by cutting down on the tedious manual work that distracts employees from higher value tasks.
Automating payroll is a good place to start. Payroll is a time-consuming process, and one that can be costly if errors occur. Payroll automation ensures that your business is compliant with all local and federal laws while offering a consistent payment experience for your team.
3. Improve talent retention
As you improve retention rates and hang on to your top talent, you’ll see a drop in employee costs. Recruitment and training costs decrease, while productivity and efficiency boom.
You also should consider the indirect costs associated with employee turnover. These costs include lost productivity, time spent on exit interviews, the loss of business knowledge and intellectual property and potentially the loss of customers.
4. Outsource tasks
Slash employee costs quickly by hiring independent contractors and freelancers to complete specific tasks instead of hiring a full-time or even long-term part-time employee. You don’t need to pay recruiting or training costs, salaries, benefits packages or payroll taxes. This strategy can even save on indirect costs, like payroll expenses and office overheads.
5. Invest in online training
Online training is often faster for businesses to set up and implement than in-person training. And it’s significantly cheaper, because you don’t have to pay for training rooms, travel expenses or catering.
Minimise your employee cost with MYOB
MYOB is a cloud-based business management platform that allows you to digitise, connect and automate all your critical workflows across customers, employees, projects, suppliers, finance, accounting and tax.
Automation across and within each of these workflows helps lighten the load for employees, helping to increase efficiency, lift productivity and free up time for higher value tasks. By using software to perform basic administrative tasks, you can keep your business lean and your employee costs as low as possible.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.