Hiring employees in a smart, cost-effective way reduces the potential negative effects that bringing on new team members can have on a business. There are many expenses to consider, including recruitment fees, onboarding and training, employee benefits, and more long term costs. The total sum of these is known as the labor burden.
What is Labor Burden?
Labor burden is the true cost of hiring a new employee, including both direct and indirect expenses. You must integrate these costs into your payroll burden when hiring a worker.
Direct expenses refer to the employee’s salary, while indirect expenses are the additional costs such as insurance, stipends, benefits, leave, etc. For example:
- Social security contributions
- Health insurance and dental
- Life insurance
- Annual vacation days and paid time off
- Pension plan or retirement benefits
- Parental leave and sick leave
- Company training
- Relocation packages as necessary
- Work visas and permits for international employees
- Statutory holidays
- Unemployment benefits and workplace accident insurance
This list differs depending on your location, tax rate, and the local employment laws. Costs such as insurance may also increase if an employee files a claim, but the above can give you a good general idea.
There are also extra fringe benefits you may wish to provide to encourage employee retention and employee satisfaction. These include cellphone coverage, company-provided equipment when working from home, gym membership, health benefits etc. They all go into the total cost of hiring a new employee.
Calculating Labor Burden: An Example
Example: John is a new employee you are hiring in the USA. His gross salary is USD$100,000 a year, but then you have to spend another $10,000 on covering his federal and state employee taxes, health insurance, social security benefits, employee training, onboarding costs, etc.
To find the final cost, simply divide the indirect costs ($10,000) by the direct costs ($100,000). That means that you are paying a rate of 0.1% in indirect costs for every dollar of salary you pay John.
Why Does Labor Burden Matter?
As a business or company you want to be able to invest in projects by hiring the best staff, all without overspending or wasting time and expenses. When you have a clear understanding of the labor burden for each new hire, you can make better decisions that get operations up and running without interruption.
If you hire an independent contractor or temporary worker to fill their position, you have to factor in giving regular wages to the absent employee as well as paying the temporary worker.
One of the quickest and most effective ways to reduce the labor burden is to hire employees through a third-party organization. They can lower the costs of employee benefits packages and insurance through group plans. These providers can also provide you with temporary workers as needed for a much lower cost.
A PEO (Professional Employer Organization) or EOR (Employer of Record) service allows you to fill vacant positions easily and inexpensively while also providing for your full-time employees.
Costs Associated with Payroll Burdens Around the World (% Based on Employee Salary)
Labor burden costs in the USA differ according to region and state. A 2022 study showed that real hourly compensation costs, including wages, benefits, social security and medicare, ranged from $35.65 to $43.84.
All employees and employers are expected to make contributions to Singapore’s pension fund, Central Provident Fund (CPF). Employers have to pay 17% and then another 20% on the employee’s behalf.
While Australia does not have social security taxes, residents are expected to pay 2% towards health insurance and employers must contribute towards their employee’s pension plans.
China has mandatory social security contributions which are divided into categories: pension, unemployment insurance, medical insurance, workplace accident insurance, maternity benefits, and the housing fund. The total cost ranges from 23-26%, depending on the region.
Employer social security contributions are 27% of the employee’s gross salary.
Using a recruitment agency to hire in the UK will cost around 20-30% of the new hire’s salary. Social security rates are 13.8%.
Social security contributions in the Netherlands average around 23.23%. At €1756 per month, the Netherlands is ranked as one of the countries with the highest minimum wage in the EU.
Employers pay 12-13% in social security contributions. Malaysia has one of the highest minimum wages in Asia. Employers should factor in at least RM1200 per month for payroll burden.
Social security rates in Brazil range from 20-22.5% for national social security, and then another 8.8% for other mandatory insurances. There’s no cap for employer contributions.
Employers in the UAE are responsible for all costs of employment and recruitment, including work visas or permits necessary. Social security is 12.5% paid by the employer.
The Importance of Reducing Labor Burden Costs
Expanding into a new market already involves many potential risks and high costs. Failure to accurately assess the labor burden of hiring employees can reduce a company’s chances during market entry. This means a potential loss of clients and longer operational times.
So how do you strike a balance between giving your employees the services they need while also staying within your budget and remaining compliant with local labor and tax laws?
You can partner with a global PEO or EOR service to care of every aspect of legal and administrative task around recruitment, employee management, global payroll outsourcing, and HR services. With a PEO or EOR partner, you can hire new employees quickly and affordably.
A professional provider can also help you reach insurance benefit levels otherwise unreachable by yourself.
Hire and Expand Worldwide with INS Global
INS Global is proud to have spent the last 15+ years helping companies expand with speed and efficiency. With our support, over 600 companies have been able to lower their labor burden rate and provide their employees with all types of employee benefits worldwide.
We offer our services worldwide, with PEO and EOR outsourcing options available in over 100 countries. Thanks to our experience and expertise, you don’t have to worry about legal compliance issues, red tape, or recruitment obstacles.
We tailor our services to your needs, and we have local knowledge and connections to help you enter new markets much faster than with traditional methods.
Contact our experts here today to learn more.