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Understanding the Biggest Cost of Doing Business

iconHuman resources icon4 min read
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When was the last time your HR team met with your accountants or financial team? Even if you do, chances are those two teams don’t meet regularly. A lack of communication between your HR and financial teams is a problem, because if they’re not working together, it’s harder for your business to optimize expenses, like labor costs. 

Labor costs are almost always the biggest expense for companies. In the past, HR teams were removed from reporting on labor costs, but due to modern hr software, executives expect HR to aide in optimizing expenses across the company, and that includes labor costs.

In order to assist with labor costs, you need your HR team to answer the following questions:

  • Are my employees engaged and productive?

  • How much are employee absences costing us?

  • Are we overspending on labor?

  • Are we paying employees based on market rates?

Absenteeism Rate

One of the ways to answer if your employees are engaged and productive is to determine your company’s absenteeism rate. An absenteeism rate is the percentage of days an employee misses unexpectedly during a specific time period. 

Why Your HR Team Should Care About Absenteeism Rate

Everyone misses the occasional day of work due to a myriad of reasons. But if absences are adding up around the office, productivity will be affected, as well as team morale and the overall performance of the business. Being able to pull reports and drill down into why employee absences are stacking up may identify if organizational, managerial, or other internal problems are the culprit. 

Industry averages: 

  • The absenteeism rate from work for full-time employees is 2.9%. 

  • Overtime is used to cover 47% of absences.

  • Coworkers are perceived to be 29.5% less productive when covering for absent colleagues. 

The Financial Impact of Employee Absences 

You can determine the actual cost of employee absences by the compensation value of the total number of days employees are absent during a given period. Chances are your executive team is more than curious about this number, as absences not only cause a financial impact, but limit team performance and goal accomplishment, stall productivity, and at worse, sway profit margins. Whether supervisors are forced to rearrange schedules or make employees work overtime, a pattern of employee absences is felt across the company.

Unplanned Absences cost employers 8.7% of payroll, on average

How to Determine Total Labor Costs

Total labor costs are the aggregate cost of all hours worked by employees, plus payroll taxes and benefits. Being able to accurately determine labor costs allows you to identify organizational trends and make impactful decisions. For example, if you’ve been paying above-average overtime costs, you can determine the cause with payroll data and reports. With actionable payroll data, you can:

  • See when the most overtime hours occur

  • Find which departments or employees are working overtime regularly

  • If similar patterns have occurred in the past or at certain times of the year

Labor costs account for 20 - 30% of gross sales, but these percentages vary by industry.

How Does Total Employee Compensation Compare to Your Budget

Total employee compensation is the total salaries and benefits paid to employees compared to the amount budgeted for the given year. Your team should be accounting for this figure. If you have high margins, it could indicate your accountant team failed to consider merit increases or newer employees becoming eligible for benefits. If you came in under budget, consider increasing your benefit options to retain talented employees and gain an edge over competitors to retain new talented employees.

U.S. salary budgets are expected to rise by 3.3% by 2020, up from 3.9%



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