When employers hire a new worker, the cost to bring them on board can be expensive. Although the employee sees his paycheck as the net result of his daily efforts, there are more costs associated to hiring than what meets the eye.
For example, companies must cover a certain portion of taxes, health care and more to keep employees on staff. More than just paying an hourly wage or a flat salary for compensation, employers have obligations to their employees beyond just supplying a paycheck. Because hiring employees is expensive, you need to get the best you can find.
Laws vary by state, but overall based on your definition of full-time or part-time, businesses must meet minimum standards of benefits to compensate employees. The Fair Labor Standards Act (FSLA) does not define full-time employee or part-time employee. What is counted as a full-time employee is generally defined by the employer by policy. The definition of a full-time employee is often published in the employee handbook.
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A full-time employee has traditionally worked a 40-hour work week with the expectation that exempt employees will work the hours necessary to accomplish their jobs. Employees who are non-exempt must be paid overtime for time worked in excess of 40 hours. Today, some employers count employees as full time if they work 30, 32, or 36 hours a week. In fact, fewer required work hours is considered a non-standard benefit in some organizations. In many businesses, one differentiation between full-time and part-time employees is eligibility for benefits – health insurance, paid time off, paid vacation and sick leave. Some organizations enable part-time employees to collect a pro-rated set of benefits. In other organizations, part-time status makes an employee ineligible for any benefits.
According to Employee Benefit News, the latest federal data shows that benefits costs account for about 30% of employees' total wages, as private-sector employers spent an average of $28.13 per hour worked for employee compensation in June 2011. Additionally, the Bureau of Labor Statistics reports wages and salaries averaged $19.81 per hour worked and accounted for 70.4% of these costs, while benefits averaged $8.32 and accounted for the remaining 29.6%.
Employer costs for retirement and savings plans are affected by several factors including the percentage of employees that participate in the plans offered by their employer. The average cost per hour worked for defined benefit plans was 1.6% of total compensation and the average cost for defined contribution plans was 2% of total compensation. Retirement and savings costs increased, both in cost per hour worked and proportion of total compensation, with establishment size.
Establishments with fewer than 100 workers averaged 2.6% of total compensation. Establishments with 100 to 499 workers averaged 3.6%, significantly less than establishments with 500 workers or more which averaged 5.4%. Private industry employer costs for paid leave (vacation, holiday, sick leave and personal leave) averaged $1.90 per hour worked (6.7%), supplemental pay averaged 2.8%, insurance benefits averaged 8.1%, and legally required benefits (Social Security, Medicare, unemployment insurance and workers' compensation) averaged 8.3 %.
According to Joseph Hadzima, Jr., of the MIT Sloan School of Management, here are considerations for any business regarding the costs to hire employees. Employment costs fall into several broad categories:
Recruiting Expenses
Finding technically qualified people who can function effectively in a rapidly growing start up venture is no easy task. In an earlier column we discussed the economic alternatives for head hunting. For this column it suffices for me to remind you to be sure to devote the time to make sure that your hires are as close to perfect "10s" as possible. Anything less will be a drag on your business.
Basic Salary
Basic salaries vary all over the place depending on the industry and a variety of other factors. There is data that can help you calibrate an appropriate base salary. Be sure to establish rational salary ranges given your growth plans. This means that in most cases there should not be great salary differentials between early hires and later employees – any "risk component" of being an early hire should be made up in the equity compensation component.
Employment Taxes
In preparing your personnel budget, be sure to include allowances for Social Security/FICA (currently 6.2% on the first $90,000 of salary), Unemployment/FUTA (6.2% on $7,000 of salary) and Medicare (1.45% with no salary cap). Workmen's compensation premiums will depend on the category of your employee, with clerical at about 0.3% of salary and manufacturing at 7.5%.
Benefits
Basic salary and employment taxes are a minimum – in most cases you will need to provide some benefits. Typical benefits for a $50,000 salaried employee include life insurance ($150) and health coverage ($2,000 – $3,000 for single persons; $6,000 – $7,200 for families). Other benefits could include long-term disability insurance ($250), dental plans ($240 – $650), dependent care assistance, tuition reimbursement, retirement plans, etc. These involve actual payment of benefits by the employer. There are also "self funded" plans where the employer contribution is the administrative costs – e.g. 401(k) savings plans where a portion of the employee's salary is withheld. Vacation is another cost but is subsumed in the basic salary. The costs to this point (basic salary, employment taxes and benefits) are typically in the 1.25 to 1.4 times base salary range – e.g. the cost range for a $50,000/year employee might actually cost from $62,500 to $70,000.
Space
Unless you are hiring traveling salespeople, you need to provide some physical space to house the new employee. Obviously the rent per square foot varies depending on the fanciness and location of the facility. But how many square feet does an employee need? Again this varies, but there are some guidelines. Work cubes are typically 8′ x 8′ in size and private offices range in size. In high tech, figure on 225 to 250 square feet per employee when you add in common space. Furnishing the space, even with used work cubes, will probably run $2,000 at a minimum.
Other Equipment
The basics these days for high tech or office workers have to include a computer and telephone. Even with decreases in PC prices, figure on $1,000+ for a computer, $500 to several thousand for software and $250 to $300 initially per telephone handset on average when you factor in installation. Don't forget the periodic expensive upgrades you will need to your LAN and voice mail systems.
When you are considering the cost of your work force, you'll need a sharp pencil. Remember, the salary is just the starting point, and everything after that still comes out of your pocket as a business owner. Make sure your accountant is on top of his game as well. You don't want any surprises at the end of the year. Employees are expensive, but not having funding to pay for them is even worse. Find the good ones, and get rid of the bad ones.
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