Managing Labor Costs

INTRODUCTION TO LABOR COSTS

AVERAGE COST OF A LABOR HOUR

The real cost of a labor hour is not the hourly wage, but the real cost may be 20-60% greater when the costs of fringe benefits are added. Figure 13.1 illustrates the cost of one full-time employee when all the fringe benefits are included. A salary based on $8.50 per hour really costs $14.19 per hour. Foodservice operations try to avoid full-time employment and thereby reduce the fringe benefit costs substantially. Figure 13.2 compares the real cost of a full-time cook with that of a part-time cook. The value of the two employees' work must be considered. For example, the value/quantity/quality of the full-time employee's work may be twice that of the part-time employee's work. For one thing, the supervision required by the part-time employee may be much greater. All of these factors are not shown when one compares the hourly wages.

Figure 13.1

Real Cost of a Full-time Employee

1. Salary based on $8.50 per hour, 40 hours per week: $17,680

2. Cost of a substitute at $7.25 per hour and 12% employer taxes for the days employee is off: 10 days per year sick, 10 days paid vacation, 5 holidays = 200 hours at $7.25 = $1450

$1,200.12 taxes = 1741,624

3. Fringe Benefits:

Employee meals valued at $3 each 260780
Employer taxes 2,122
Health insurance (employer pays 50% of premium) 1,680
Retirement 1,768
Uniforms and laundry 616
Worker's Compensation and Employment Commission 414

4. TOTAL LABOR COSTS FOR YEAR $ 26,684

5. Number of days employee actually works per year: 235

6. Total labor costs divided by number of days worked =$113.55/day

7. Daily labor costs $113.55 divided by 8-hour day =$ 14.19/hour

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8. If this employee is productive only 50% of the time,

the real cost of an hour of productive time = $ 28.38/hour

Figure 13.2

Cost of Part-time Employee (or Substitute) Compared with a Full-time Employee

1. Salary based on $7.25 per hour 8 hours per day$ 58.00

2. Cost of a substitute for days off: 0

3. Fringe Benefits:

Employee meals valued at $3 each (if 8 hours worked) 3.00
Employer taxes (7.65%) 4.44
Health insurance: 0
Retirement: 0
Uniforms and laundry: 2.80
Worker's Compensation and Employment Commission: $0.80

4. TOTAL LABOR COSTS FOR DAY $ 69.04 per day

5. Number of hours substitute worked: 8 hours

6. Total labor costs per day divided by number of hours worked = $8.63 per hour

7. If the part-time employee is productive 50% of the time, the real cost of an hour of productive time = $8.63 times 2 = $17.26

8. If the part-time employee is only productive 33.3% of the time, the real cost of an hour of productive time = $8.63 times 3 = $25.89

Note: Something crucial that this exercise does not compare is the quality of the products produced and of the work. The full-time, trained employee will produce more than the untrained employee.