Keep your business running on budget.

What is the cost of labor?

The definition of the cost of labor is the sum of all employee wages paid, as well as how much it costs to provide employees benefits and how much needs to be paid in state and federal payroll taxes. Employee benefits includes health insurance, paid time off, and more.

Labor costs include both direct and indirect employee costs. Direct costs means hourly cost for employees who make a product, such as a worker on an assembly line. Indirect labor costs are reserved for the hourly rates of employees who are considered support labor. These employees include those who maintain factory equipment.

It’s important to know exactly what the total cost of your labor burden is, because this factors into how much you charge your customers for a product. If you leave any costs out of your sales price calculation, you won’t profit as much as you expected, and you’ll end up losing money.

How much does an employee cost?

The cost of each employee depends on how much his or her hourly rate or gross wages are, as well as the total cost of every other employee-related expense. These expenses include Social Security and Medicaid taxes, state payroll taxes, insurance, paid time off, or other benefit costs, and any equipment or supplies the employee may need to do his or her job successfully.

What is overhead?

The cost of overhead simply represents the amount of money it costs to provide benefits to your employees. Direct and indirect labor costs aren’t the only factor that go into how much an employee costs your business, you must calculate the amount of money it costs to provide each employee health insurance, property taxes on your brick-and-mortar locations, utility costs such as electricity and water, and more.

How do I know how to calculate labor costs?

To calculate your labor costs, first multiply the hourly wage of your direct labor employees by the number of direct labor hours they work in a year. Then, add in the total cost of related expenses, such as workers compensation, unemployment insurance, and other extra costs related to employees.

For example, if you have a full-time employee who makes $20 an hour and works 40 hours a week, for 52 weeks, that employee would work 2,080 hours. This means that their labor cost is $41,600 before taxes.

Now that you’ve calculated the employee’s pre-tax labor cost with their number of hours and hourly rate, you’ll need to determine the amount of annual overhead, including building costs, utilities, payroll taxes, benefits, paid time off, meals, insurance, property taxes, and supplies and equipment.

Add your total overhead, and once you’ve done that, divide it by the number of employees you currently have. For example, if you spend $60,000 in overhead costs per year and also have 6 employees, you technically spend an additional $10,000 on each employee. So, if the employee’s labor cost was originally $41,600 per year, it is now $51,600 per year due to the extra overhead cost.

You can also use a labor cost calculator or an employee cost calculator to determine the amount of money you’re spending on each employee instead of doing the math on your own.

How do I manage the cost of labor?

There are many ways to manage your labor costs, including: reviewing your levels of compensation, reducing employee turnover, cross-training employees, sharing jobs between employees, converting fixed salaries and wages into commissions, automating non-critical tasks, and more.

Another great way to manage your labor costs is to enlist the help of an online software that does the hard work for you, such as Homebase. Homebase helps you manage rising labor costs by providing robust labor cost reporting, managing costs in real time, and preventing labor leakage by stopping time theft.

How do I reduce labor costs?

Labor costs can be reduced by using a scheduling and time-tracking system such as Homebase. As mentioned before, Homebase works as your second pair of eyes on overtime and rising labor costs, and provides robust labor cost reporting so you’re always on top of who’s not taking breaks, and who’s about to hit overtime.

If you run a restaurant, there are several other ways to reduce labor costs. The first is to control your attrition rate. Your attrition rate includes recruitment, new worker training, lost working hours and efficiency.

Several studies say that a high attrition rate is the biggest factor in rising labor costs for restaurants. Consider ways to reduce your attrition rate by maintaining the workforce you already have. Introduce employee loyalty programs, improve work culture, and build a bond with your team members to make sure your turnover rate is low.

An appropriate salary structure is also key to reducing labor costs. Consider implementing a composite compensatory package for your staff members, which could include a fixed commission or performance-based incentive program.

How does Homebase help with labor costs?

There are several ways Homebase helps small business owners and managers track and reduce labor costs with ease. First, Homebase provides robust labor cost reporting in the form of detailed cost reporting and labor cost tracking as a percentage of sales automatically. By viewing the robust reporting, you’ll be able to easily spot trends by role or department to manage costs.

Homebase also lets you manage labor costs in real time by tracking your sales and costs from any browser or by using the free Homebase mobile app, which is available on iOS and Android. You’ll even get alerts when an employee is about to hit overtime, which you should be tracking so that you don’t have to pay extra.

Labor leakage and time theft is also prevented through Homebase. Every minute an employee works adds more labor cost to your bottom line, so use Homebase to prevent employees from clocking in early, and make sure every employee is taking breaks. This will save you hundreds of dollars every month.

Another way Homebase helps small business owners and managers decrease labor costs? Added visibility into your budget with advanced scheduling and alerts. You can forecast labor costs and overtime automatically as you build your schedule.

You can even reduce surprises by looking at your schedule and viewing the weather and sales forecast right there on your Homebase schedule. If an employee is about to hit overtime, you’ll get a text message. You’ll even get a text message if an employee is set to hit overtime later in the week based on their scheduled shifts.

These overtime and early clock-ins can be tracked across any location. Many Homebase users have more than one brick-and-mortar location, or they allow their employees to work off site or remotely.