This article is written to provide you with an understanding of what a labour burden rate is, why it is used, and what is generally included in the calculation.
So, what are burden rates?
Burdens are the additional costs that a business incurs by employing people, which excludes an employee’s regular base pay (salary/hourly wage rate). In other words, it refers to the total costs incurred by a company for hiring and retaining an employee beyond their direct wages. The total cost of burdens become a rate when you calculate it, which we will discuss later.
They are generally used to determine the company’s overall labour or staffing costs. Knowing what all is factored in burden rates can be convoluted, however, simply put, the calculation factors in all the expenses relating to an employee’s total rewards, excluding their regular pay.
Please keep in mind that burdens only include the costs that the business incurs, not the employee. What is included in the burden total cost will vary depending on your company’s employer-paid programs or industry. Below we have listed out the costs that are generally factored in labour burdens, but are not limited to:
- Paid Time Off
Note: If you have salary employees or annualize the hourly paid employees wage rates, you do not need to capture this as it is paid time that is already included in the employee’s base pay.
- Vacation Paid Out
- Group Benefits
- Insurance Premiums
- Allowances, Uplifts, Scheduled Overtime, etc.
- RRSP or Pension Contributions
- Stock Options
- Workers Compensation
- Government Statutory Tax Deductions
When it comes to calculating burden rates, ensure to not set it and forget it! As these amounts are subject to change based on adjustments made to an employee’s total rewards or other external factors (i.e. insurance premium increases). We recommend conducting an analysis regularly to ensure the adjustments are accurate, at minimum complete this analysis annually.
Steps to Calculating Burden Rates
- Total the additional costs to get the Total Burden $Amount
- Take the Total Burden $Amount and divide it by the Base Pay to get the Burden Rate %
As seen above, the burden rates show that the business incurs an additional %Amount for each employee. Burden rates can be reported in dollar amounts as well, which paints a different picture:
Here, the burden rates show that for every dollar you spend on wages, the business incurs an additional $Amount for each employee.
If you would like to break burden rates down further by each additional cost, you can simply do this by using the same formula as above.
Now that you have some understanding of what labour burden rates are, what is generally included into the total, and the calculation to determine what each employee’s burden rate is, lets take it a step further.
Say that you are interested to know what each employee is costing the company, not only for being employed, but also for the hours worked daily or on certain projects.
Steps to Calculating Labour Costs
- Add up the employee’s Base Salary and Total Burden Costs to get their Total Compensation Cost
- Take the Total Compensation Cost and divide it by the employee’s Annual Hours of Work to get their Overall labour Cost Hourly Rate
Once you have calculated their Overall Labour Cost Hourly Rate, you can multiply it by their hours of work to get a clearer picture of the costs the business incurred for their hours of work or hours spent working on a certain project.
Note: If you are interested in knowing each employees Burden Hourly Rate, you would take their Total Burden $Amount and divide it by their Annual Hours of Work.
Labour Burden Rates are an important tool used by businesses to get a clearer picture on how much it actually costs a business to employ someone or how much it cost the company for the employee to work on a certain project. We would like to mention that there is another burden rate used by companies which is called Inventory Burden Rates, however, that will be discussed at another time.
Download our Labour Burden Rates Spreadsheet for calculating Labour Burden Rates in your own business. If you require further assistance, please connect with one of our BIG Representatives.