Why a $14/hour employee costs $20

Why a $14/hour employee costs $20
By Chris Owen

CNN/Money did a story a while back on why you probably cost your boss a lot more than you think you do.

The story focused on Jim Garland, who owns Sharp Details, a corporate aircraft cleaning and support services company at Dulles International Airport, where a $14 per hour worker has a true cost of nearly $20 per hour, or about 40 percent more than base pay.

This so-called "loaded rate" includes fixed expenses -- federal and state taxes, health insurance, workman's compensation, uniforms, and paid time off -- along with soft costs like the time spent training a new hire.

Business' Most Expensive Investment

Ever since the Great Recession began early in 2008, the nation's lawmakers have been coming up with ways to reduce the jobless rate, including a tax break for hiring the unemployed. But no matter what incentives the government offers, it's hard to convince business owners to hire until they're absolutely certain they need to. Employees are often the most expensive investment a business makes.

"Our entire existence revolves around two numbers: revenue and payroll," Garland told CNN/Money. "Payroll for our 60 workers accounts for about 70 percent of our firm's operating costs."

As a general rule, business owners should expect an employee to cost an additional 25 percent to 30 percent on top of base salary each year.

Taxes Add to Costs

State and local taxes can vary, but federal taxes are standard: Social Security tax is 12.4 percent on the first $106,800 of earnings, and Medicare taxes run another 2.9 percent of all wages. The employer and employee each pay half.

There are hidden costs as well. The little perks that employees come to expect, from health insurance and free coffee and bagels to daycare services and transportation allowances, also factor into the price tag of a new worker.

"All of a sudden, by hiring a new employee, adding up all the fringe benefits, it can be costly," said Tom Ochsenschlager, a senior manager at the American Institute of Certified Public Accountants.

Bad Hiring Decisions Cost

A bad hiring decision can be a big hit to a company's bottom line. The cost of losing an employee and hiring a replacement complicates the "loaded rate" calculation of what a worker costs each specific business.

Garland's employees at Dulles work on corporate jets, and each of his new hires has to go through a full FBI background check and drug screening. Swapping an experienced worker for a brand-new replacement that needs training sets back the team's productivity.

Unless I mis-read this post, it sounds like an argument for eliminating the minimum wage, and here is Peter Schiff's take on the subject:



...A bit dated, but still valid!

It's a ridiculous set of facts, and I've been self-employed far more than not so I'm well aware of the expenses involved in running a business.

A business does not "earn" an employee's SS or Medicare taxes paid "by the employer." The employee does.

And, what do you suppose the $14/hr. employee's time is billed to the employer's customers? $30/hr? $60/hr? Somewhere in that range.

Frankly, I don't know what the point of this article is. Hire illegals and be free of "business expenses?"

Peter Schiff would argue that if you get rid of the minimum wage, you get rid of illegals. Sounds simple enough.

dsmbaptist wrote:Peter Schiff would argue that if you get rid of the minimum wage, you get rid of illegals. Sounds simple enough.

It's not quite as simple as that. You'd have to eliminate not only the minimum wage, but most labor regulations that restrict an employer on how he or she can pay the employees. These include overtime pay laws, break laws, etc. An employee and employer should reach an agreement on these matters, not the government.

Secondly, you need to remove the incentives for people not to work, mainly in form of welfare "benefits". If you remove the means for the parasite to survive, it will evolve into a productive member of society.

Lastly, the war on drugs needs to be ended. Mexicans are risking their lives to come here, not because we are the greatest nation on Earth, but because the drug trade has destroyed their country. By comparison, any other country looks better than Mexico when you consider the rampant corruption and the ineffective means by which the police are handling the situation. By ending the drug war, you end the vast criminal empires that dominant that region of the world and things start getting better, economically speaking.

I'm sure there is a lot more that would need to be done, but these are the major factors I can think of off the top of my head.