Managing Non-Wage Costs: Maximizing Labor Investments
Written by: Eveline Jacobse
Last updated: 28 November 2023
Table of contents
- What are non-wage labour costs?
- Labor cost percentage formula
- How are the non-wage labour costs calculated?
- What do the non-wage labour costs include?
- What is the share of non-wage labour costs in total labour costs?
- Are there ancillary wage costs that the employer has to bear?
- Contribution assessment limits in social security for 2022
- How are the non-wage labour costs calculated?
- What are the employer costs?
- Voluntary social benefits from the employer
What are non-wage labour costs?
Non-wage labour costs are all costs associated with an employee that is not related to their actual wage or salary. These are costs that the employer incurs on top of the employee's wages and salaries and are also known as indirect labour costs. A company must pay these costs in addition to the wages and salaries of its employees. Examples of non-wage labour costs are health insurance premiums paid by the employer, contributions to pension schemes and paid vacation benefits.
What does Labor Cost? Labour costs include wages, payroll taxes, and other employee expenses. It's divided into two categories: direct and indirect labor costs.
Paying employees directly for the production of products and services is what constitutes direct labor costs. An indirect labor cost is a cost associated with facilitating production. An excellent example of indirect labor cost is the wage of a worker whose job is to maintain the machinery used in manufacturing.
How Much Does Labor Cost? Costs of Labor vary from industry to industry. But some things are the same, which helps businesses figure out how much labour costs. Here's what you need to take into account when figuring out how much labour costs:
Think about your expenses for everything listed above, and you'll get closer to figuring out how much labour costs.
Labor cost percentage formula
Calculating labour cost percentage:
Labor Cost Percentage = (Total Labour Costs/Total Sales) x 100
Direct vs. indirect labour costs
XYZ Furniture has affordable dining chairs. Production-related direct labour expenses. Direct expenses include XYZ paying workers to run chair-making machinery. XYZ's security costs cannot be connected to a particular industrial deed.
Variable and fixed labour costs
Labour costs are fixed and variable. Labour costs vary with equipment output. Variable labour costs are affected by production. Fixed labour costs may be in long-term contracts. A firm may have a fixed-cost equipment repair and maintenance contract—fixed costs and variable costs examples. Fixed and variable costs can both be categorized as labour costs.
How are the non-wage labour costs calculated?
To calculate non-wage labour costs, you must first determine the total cost of all benefits to which an employee is entitled. You can find this number on the employee's payslip or company records. Once you determine the cost of the benefits, you need to divide that number by the number of hours the employee has worked. It is how you get the non-wage labour costs per hour.
What do the non-wage labour costs include?
There are many different types of non-wage labour costs, but some of the most common include the following:
- Paid vacation
- compensation premiums
- Pensions and unemployment insurance premiums
Contribution rates for these types of insurance are set by law. However, health insurance companies can demand an additional individual contribution.
The trade associations require employers to pay contributions to insure employees against accidents. The contribution amount depends on the hazard class, i.e. the accident risk of the respective occupation.
Employers pay employee contributions in three different ways:
Contribution 1 (U1):
With the Contribution, the health insurance companies assume part of the continued payment of wages in the event of the employee's illness. The contributions vary depending on the health insurance company. Most insurers offer a range of tariffs: The employer chooses a percentage of the gross salary, which the health insurance company pays. In most cases, the insurer covers 40 to 80% of the gross salary.
Allocation 2 (U2):
Health insurance companies pay wages during the so-called maternity leave. Contributions vary from company to company, and all employers are required to contribute.
Contribution 3 (U3):
If an employee cannot work for more than three months due to illness, nursing care insurance pays up to 70% of the last salary. Participation in this system is voluntary, but companies are encouraged to participate.
Other Additional Costs
In addition to wages paid and salaries, employers must pay training and education costs for setting up the workplace, etc., when hiring workers. In this case, however, they have not considered non-wage labour costs, as they are not directly linked to wages. Instead, they are considered ancillary personnel costs.
What is the share of non-wage labour costs in total labour costs?
Non-wage labour costs vary from country to country and even from sector to sector. In general, non-wage labour costs are lower in manufacturing sector than in services. In the service sector, social security contributions make up a significant part of non-wage labour costs.
How high are the non-wage labour costs for employers? The additional costs per employee subject to social security contributions are currently around 22 per cent of the gross salary, which you can assume when planning personnel costs. So employees are a lot more expensive than they appear.
HR managers responsible for wage and personnel planning should know the current contribution rates. The gross wages and ancillary wage costs are calculated separately for the employer. Taxes are calculated as a percentage of gross wages. Taxes are usually shared between employer and employee. Sometimes, they are borne entirely by the employer.
What is the employer contribution in per cents? Below are the contribution rates:
Unemployment insurance: 1.2%
Statutory health insurance: 7.3% (additional health insurance contributions are also divided equally according to special regulations on reduced contribution rates)
Nursing care insurance: 1.525% (in Saxony, the employer bears 1.025% of these costs)
Statutory accident insurance: the employer bears the full contribution of 1.6% (depending on the severity of the accident risk)
U1 Contribution: Employers with fewer than 30 eligible employees can apportion U1: 1.1% to 39% (only).
U2 Contribution: typically between 0.14% and 0.88% of the employee's salary (fully paid by the company and covers maternity benefits)
U3 contribution: 0.06% (employer pays all costs)
Add the statutory contribution assessment limits that apply to each branch of social security. The employer may not deviate from these contributions regarding ancillary wage costs.
Are there ancillary wage costs that the employer has to bear?
Non-wage labour costs of the employer
Around 21 per cent of an employee's gross salary is used to pay social security contributions. The employer pays half of the taxes. The employee contributes part of the SV. The employer contributes the rest and pays most of the taxes. Accident insurance is an exception: Here, the employer pays everything.
Employees' contributions are transferred directly from the employer to the insurance companies. The amount is deducted from the salary before tax and withheld by the employer. It will be shown on the payslip. The same applies to the wages that are paid regularly.
The ancillary wage costs are made up as follows:
The employer's social security contributions include health, unemployment, pension, accident and long-term care insurance.
Costs of education and training related to employment
The following expenses are also included: clothing, recruitment costs, moving costs, training costs, vacation pay, Christmas bonus and benefits in kind.
Payroll tax or employee tax
Social Security contributions are monthly expenses. You can disregard additional costs for professional education and training and other taxes and fees as they are not fixed monthly costs.
Contribution assessment limits in social security for 2022
The contribution assessment limits mean employers only have to pay social security contributions above a specific income limit. Well-paid employee benefits remain attractive to the employer even if his gross wage exceeds this limit because the employer does not have to pay social security contributions.
These limits are adjusted every year by the contribution assessment limits of the federal states. There are also different limit values for statutory, pension, or unemployment insurance.
In 2022 it will be 58,050 euros per year in statutory health insurance, 84,600 euros in statutory pension insurance and 81,000 euros in statutory unemployment insurance.
How are the non-wage labour costs calculated?
The non-wage labour costs are calculated using the following formula:
Net wage + one-off payments/number of hours worked x number of employees = non-wage costs,
wage labour costs, including all social security contributions and wage taxes that an employer has to pay. They also include the cost of job-related education and training and other benefits that an employee may receive.
Non-wage labour costs can vary significantly from one company to another and even from one job to another within the same company. It's important to realize that these costs are in addition to an employee's wages and salaries.
Wage labour costs do not include the following:
- Vacation pay
- Christmas bonus
- pay Recruitment
- costs Relocation
Wage fixed labor costs = $1,000 + $500 / 20 hours x 5 employees = $1,500
In this example, non-wage labour costs would be $1,500. It includes all social security contributions and an employer's wage taxes. It also includes the costs of holiday pay, Christmas bonuses, severance pay, recruitment, Relocation, training and education.
What are the employer costs?
In this sample calculation, a childless employee with statutory health insurance in Hamburg with tax class I and a gross monthly salary of 4,900 euros does not have to pay church tax.
The social security contributions that the employer has to pay on the gross monthly salary of this employee are 1,025.32 euros.
- EUR 357.70 for statutory health insurance
- term care insurance
- EUR 455.70 for statutory pension insurance
- EUR 58.80 for unemployment insurance
- EUR 78.40 for accident insurance
- If variable and voluntary benefits are added, the ancillary wage costs increase even further. The following picture emerges of a commercial mini-jobber who earns EUR 450 a month:
- EUR 58.50 for statutory health insurance
- EUR 67.50 for statutory pension insurance
- EUR 9.00 flat
- EUR 7.20 for statutory accident insurance
Voluntary social benefits from the employer
In addition to non-wage labour costs, employers often offer their employees social benefits. There are several benefits to expect, including:
- Meal vouchers Health insurance
- car or fuel card
- grants Childcare grants
- Free or discounted products/services
- Gym memberships
As you can see, non-wage labour costs make up a large part of an employee's total compensation. You must be aware of these costs to budget accordingly as an employer.
You can attract and retain talent when you offer your employees competitive benefits. When designing your benefits packages, you should consider both mandatory non-wage labour costs and the optional benefits you may offer.
Non-wage labour costs as a percentage of gross
wage Non-wage labour costs typically amount to around 30% of an employee's gross salary. A company's location and specific position can affect this number.
In Germany, for example, the ancillary wage costs for a software developer with a gross salary of 60,000 euros are around 18,000 euros. In the US, non-wage labour costs for the same position would be approximately $21,000.
In summary, you can say that non-wage labour costs represent a significant cost factor for employers. They include mandatory costs such as. Social security contributions and voluntary benefits. B. Meal vouchers. When designing your benefits package, consider both mandatory non-wage labour costs and the optional benefits you may offer.
Eveline is an experienced HR expert with a passion for content writing in the field. She has distinguished herself by sharing her in-depth knowledge and insights into HR topics and trends through articles that are both practical and informative. Her experience and expertise in human resources add value, and she continues to dedicate herself to informing and inspiring peers with her well-thought-out and well-founded content.
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