What it means
When a manager hires someone for $60,000, the company does not spend only $60,000. It also pays employer taxes and social contributions, health or pension benefits, paid leave, bonuses, recruitment fees, training, software licences and a desk or laptop.
Together these can add a large percentage on top of base pay. Finance teams calculate total labour cost to budget accurately and to price products and services.
In a consultancy or factory, labour is often the biggest expense, so understating it leads directly to underpricing and shrinking margins. It also feeds into measures such as cost per hour and cost per unit produced.
The usual building blocks are direct pay, employer-paid taxes and contributions, benefits, and indirect costs such as training and equipment. Some businesses also add overheads such as management time, office space and human resources support, which gives a fully loaded cost.
Whether to include these depends on the decision being made. A helpful shortcut is the burden rate or on-cost percentage, which expresses the extra costs as a share of salary.
The rate differs by country, industry and company because tax rules and benefit packages vary. Knowing it lets managers estimate the real cost of a hire quickly.
Total labour cost also matters for decisions to outsource, automate or relocate. Comparing a contractor's invoice with an employee's salary is misleading unless the employee's full cost is used.
The comparison also needs to consider productivity, since a cheaper worker who produces less may cost more per unit of output. Watch out for hidden or irregular costs, such as overtime, severance, recruitment fees and costs of staff turnover.
These do not appear in a monthly salary figure but can be significant over a year.
In practice
Real-world examples
Example 1
A restaurant owner plans to hire a chef at $55,000. His accountant points out that taxes, insurance and benefits will add roughly a fifth to the cost, so he budgets for a total near $66,000 before agreeing the offer. He also adds a small amount for recruitment and training, so there are no surprises in the first year.
Example 2
A software company compares hiring a developer with using a contractor at $90 an hour. The finance manager calculates the employee's fully loaded hourly cost, including benefits and equipment, and finds that the employee is cheaper for work that lasts all year.
Example 3
A manufacturer calculates the labour cost in each unit of product. By dividing total labour cost for the production team by units made, it finds the cost per unit and uses it to set a selling price with a healthy margin. The result also highlights which production lines are most labour intensive.
Think of it
Owning a car is like employing staff. The sticker price or monthly loan payment is just the salary. The total cost includes petrol, insurance, MOT, servicing, and parking, which you must pay to keep it running.
Formula
Calculation
Total labour cost = Base salary + Employer payroll taxes + Benefits + Training + Equipment and other costs
Burden multiple = Total labour cost / Base salary
An employee earns a base salary of $60,000. Employer payroll taxes are 8% of salary, which is 60,000 x 0.08 = $4,800. Benefits cost $6,000, training $1,200 and equipment $2,000. Total labour cost = 60,000 + 4,800 + 6,000 + 1,200 + 2,000 = $74,000. The burden multiple = 74,000 / 60,000 = 1.23, so each $1 of salary costs the company about $1.23.Case study
Seen in the real world
Copperbeech Consulting is an illustrative, fictional firm that billed its junior analysts at $50 an hour. The founder believed the rate was generous because the analysts earned $30 an hour in salary.
When the finance manager calculated total labour cost, she included taxes, benefits, training, software and the unbillable time spent on admin and holidays. The loaded cost came to $47 per billable hour, leaving almost no margin.
The firm raised its rate to $65 and reduced unbillable time with better scheduling. In this illustrative story, profit on junior work rose from near zero to more than 25% of revenue within a year. The founder now asks for a loaded cost estimate before approving any new hire or setting any new billing rate, and the finance manager updates the burden percentage every January.
Watch out
Common mistakes
- Budgeting a hire at the salary alone, when taxes, benefits and equipment can add a large percentage.
- Comparing a contractor's rate with an employee's pay rather than the employee's fully loaded cost.
- Forgetting unbillable or idle time, which raises the effective cost of each productive hour.
Questions
People also ask
What is a typical burden rate?
It varies widely by country and company, but employers often find that extra costs add a noticeable share on top of base pay.
Should overheads be included in total labour cost?
It depends on the decision, because a fully loaded figure for pricing includes them while a simple payroll budget may not.
How does total labour cost differ from payroll?
Payroll is the amount paid through the pay system, while total labour cost also includes benefits, training and other costs outside payroll.