Do you know what the true costs of your employees are? At face value, it looks like their wages are what your business will pay. However, the true cost is a lot more than their hourly or weekly wage. Here are seven simple, but important, things to remember about working out the true cost of your Payroll obligations.
Firstly, assuming your staff members are covered by an Award, you can determine the correct award rate for your employees using the Fair Work Ombudsman, Find My Award calculator here. Then you must add the compulsory costs of Superannuation and WorkCover. Superannuation payments currently sit at 9.5% of the employee’s ordinary earnings and while WorkCover rates vary greatly between industries, it can exceed 5% of the employee’s wage in high-risk situations.
Secondly, assuming your employee is permanently employed, they are entitled to Annual Leave, Leave Loading, Sick Leave and Public Holiday pay, along with potentially, Long Service Leave. This accrual needs to be built into the overall cost, so when you consider the yearly effect this has on their hourly/weekly rate, it can rapidly increase the true cost to your business. Annual Leave effectively leaves your employee available to work 48 weeks per annum. Additionally, they are usually entitled to 10 days Sick Leave and 13 paid Public Holidays each year.
Let us look at a quick example:
You are hiring a new full-time cleaner for your Home Cleaning Business. According to the Cleaning Services Award, you are obliged to pay them a weekly wage of $804.90 (check the award yourself for the correct level and pay rates for your business) and penalty rates for night shifts, weekends, and public holidays. This means you will be paying your new employee $41,854 per annum. However, this is NOT the true cost to your business.
Thirdly, you must factor in Superannuation, currently 9.5% of their wages, which adds another $3,976 to their annual cost. WorkCover, which (for the purpose of this example) is 5% of their wages, adds yet another $2,092 per year. Your employee is now costing you $47,922 per annum.
You will also need to consider any relevant allowances, plus Annual Leave, Sick Leave and Public Holidays, for example, for which the employee will be paid but will be absent from work. There will probably be costs incurred if they need to be replaced during absences. Penalty rates might apply if, for example, an employee works on a public holiday or additional hours (overtime).
However, the true cost is still not quite accurate at this point as you must also consider the cost of the recruiting process. Did you have to pay for advertising space? Did you spend time and money on training them? According to Australian Recruitment Statistics, the average cost per hire of a new employee is around $5,000 when factoring in costs of hiring, lost time in filling the position, training and for those employees who do not stay.
And if you are a larger business, you may also have to include Payroll Tax obligations which, depending on your state, could be an extra 4.75% on top of their wages again. (We highly recommend speaking to your accountant about this.)
Lastly, how much is this whole process costing you in Professional Services and Human Resources? While this figure can be apportioned across all employees, there is still an additional cost involved with your Accountant completing your tax obligations and transferring the tax withheld each quarter to the Australian Taxation Office. Plus, the cost of your Human Resources processing the weekly payments in the first instance must also be factored into your calculations.
To quickly summarise, here are the seven things you need to remember about working out the true cost of your Payroll obligations:
1. Using the correct award and penalty rates
2. Compulsory Superannuation
3. Compulsory WorkCover costs (which vary per industry)
4. Annual Leave, Sick Leave and Public Holiday
6. Payroll Tax
7. Human Resources and Professional Services fees
Depending on your business, you may find that a new employee costs anywhere between 1.3 – 1.5 times their actual wages paid. It is very important, therefore, that you remember to include all the above-mentioned costs when working out the true nature of your Payroll obligations.