Have I Costed My Employees Correctly?
One of the biggest reasons businesses fail—particularly in
the early stages—is the incorrect costing of employees. Before long, the
business may find itself owing superannuation or PAYG, creating a problem so
big and daunting that the business collapses.
To avoid this, it's crucial to understand the true cost of an employee’s billable time. Let’s break it down with an example.
Case Study: A Truck Driver Earning $70,000 Per Year
Imagine you’re running a truck hire business and have agreed
to pay your truck driver $70,000 annually. Due to standing time, time spent
preparing to leave the yard in the morning, and time returning and packing up
at the end of the day, this driver is billable for only 6 hours per day.
So, what should you include in your cost calculations for
the driver when setting the hire rate?
Base Rate
The first step is calculating the basic hourly rate. For a
full-time employee working 38 hours per week over 52 weeks (1,976 hours
annually), the hourly rate is:
$70,000 ÷ 1,976 = $35.42/hour
Important: Do not use this number as your cost! There
are many additional considerations..
Additional Costs to Consider
1. Superannuation
The current superannuation rate is 11.5%:
$35.42 × 11.5% = $4.07/hour
2. Leave Entitlements
Full-time employees are entitled to various types of leave, including:
Annual leave: 4 weeks (152 hours)
Leave loading: 17.5% of annual leave (26.6 hours)
Public holidays: 13 days (99 hours)
Carer’s leave: 10 days (76 hours)
This totals 327 hours of non-billable time:
327 hours × ($35.42 + $4.07) = $12,913.23
Add leave loading (26.6 hours × $35.42):
$942.17
Total leave cost (without replacement): $13,855.40
Optional - Casual Replacement During Leave
If you opt to replace the driver with a casual employee
during their leave, you need to account for the casual loading rate (commonly
25%):
152 hours × ($35.42 + $4.07 + $8.85) = $7,347.68
This brings the total leave cost to $21,203.08 when a casual replacement is used.
3. Workers' Compensation
Using a modest rate of 2.2%:
$70,000 × 2.2% = $1,882.16
4. Payroll Tax
While this isn’t relevant for small businesses, it becomes
important as you grow..
Total Cost of Employment
Now, let’s summarise the total cost of employing this truck driver for 1,976 hours of work:
|
Item |
Cost |
|
Base wage |
$70,000 |
|
Casual replacement |
$6,729.04 |
|
Leave loading |
$942.17 |
|
Superannuation |
$8,823.83 |
|
Workers' compensation |
$1,882.16 |
|
Total |
$88,377.20 |
Calculating Billable Hours
The driver’s billable hours are as follows:
365 days – 104 weekends – 10 carer’s leave days – 13 public
holidays = 238 working days
238 days × 6 billable hours/day = 1,428 billable hours
The real cost per billable hour:
$88,377.20 ÷ 1,428 = $61.88/hour (with casual
replacement during leave)
If you choose not to replace the driver during leave, the
cost per billable hour increases:
$81,648.16 ÷ 1,308 = $62.42/hour.
Why is Not Replacing the Driver More Expensive?
When the truck sits idle during the driver’s leave, those non-productive hours reduce the overall billable hours. This increases the effective cost per hour of the regular driver.
Reducing Costs
To reduce employee costs, maximise their billable hours. One strategy is to replace employees in billable roles with casual staff during their leave periods.
Conclusion
The difference between the base hourly rate of $35.42
and the actual cost of $61.88-$62.42 is significant. Using the base rate
for costing your services will likely lead to undercharging, heavy workloads,
and little to no profit.
By understanding and correctly calculating employee costs, you can set appropriate rates for your services and ensure the long-term success of your business.
The Affordable Business Consultant can work with you to ensure that the employees are costed correctly and assist with strategies that increase profits and reduce costs.