Labor Cost

What total labor cost includes

Wages are only the start. A full labor cost figure includes:

• Base pay and salaries, plus overtime, shift differentials and premiums.
• Bonuses, commissions and incentives.
• Employer payroll taxes: Social Security and Medicare (FICA), federal and state unemployment taxes.
• Health insurance, retirement contributions and other benefits.
• Workers' compensation insurance.
• Paid time off and holiday pay.
• Temporary agency and contractor labor, if you are measuring total workforce cost.

The costs on top of wages are often expressed as a burden rate. For US hourly employees a loaded cost of 1.25 to 1.4 times base wages is a common rule of thumb, higher where benefits are generous.

Typical ranges

Labor cost percentage varies so much by industry that cross-industry comparisons are close to meaningless. Restaurants commonly target roughly 25 to 35% of sales. Retail often runs lower, in the low teens to around 20%. Service businesses such as contact centers, staffing firms and professional services can exceed 50 to 60%, because people are the product. Compare yourself with your own history and with similar operations, not with a general benchmark.

Labor cost in high-volume operations

In operations with large hourly workforces, labor cost moves with scheduling and turnover more than with pay rates. Overtime from understaffed shifts, training hours for new hires who quit in 60 days, and agency premiums to cover gaps can each add several points. A distribution center paying $19 an hour that runs 12% overtime at time-and-a-half pays the equivalent of a 6% raise on those hours, without the retention benefit of an actual raise.

Track labor cost per unit of output as well as percentage of revenue: cost per order shipped, per contact handled, per patient day. Those numbers show efficiency even when prices or volumes change. Compare with revenue per employee and headcount measured in full-time equivalents to see whether costs are rising from pay or from staffing levels.

Reducing labor cost without cutting pay

• Match schedules to demand forecasts so you are not overstaffed at quiet hours and paying overtime at peaks.
• Reduce early turnover; each replacement repeats recruiting, onboarding and training costs.
• Cross-train so absences can be covered without overtime or agency staff.
• Fix processes that create rework.

Cutting wages or hours below what the work needs usually raises turnover and errors, which costs more than it saves. Wage and hour rules, including overtime under the FLSA and state scheduling laws, still apply, and they vary by state.