How Do You Calculate the Average Cost per Employee?

24th August 2020

employee costs

Calculating the average cost per employee can be a complex task, as there are many different aspects to take into account. It’s not as simple as just deciding on their wage or salary; employees also need to think about the costs they will incur for pensions, bonuses, expenses, training, company vehicles, and overheads among other things. Matters get even more complicated if the employer supplies private medical benefits or a company car.

Finding the Average Cost per Employee

To find out how much your staff is costing you, you need to consider all the ways in which you spend money on them. It’s not just a matter of working out the payroll cost per employee.

Recruitment Costs

The cost of any employee begins before they even start working for your company, with the recruitment process. This could comprise any or all of the following:

  • Ad placement
  • Agency fee – this is usually between 15-20% of an employee’s salary
  • Employee referral scheme payment
  • Relocation costs

In addition to these, you also need to take into account the time that has been spent in preparing for the new recruit. For example, existing members of staff will have invested time in writing a job description and conducting interviews.

Overheads & Software

Software costs, IT support and premises overheads need to be taken into account with each hire as well. Depending on the environment, all employees share in the costs of utilities including rent, water, gas, electric, and internet access. This is alongside the monthly subscription to any software they need access to and external IT support.

Equipment & Sundries

Each employee requires their own equipment, so in cases of growth rather than staff replacement, there are substantial additional costs in this respect. Depending on the line of work this could include things like a desk, computer, and chair, or a more extensive list like a full PPE kit and set of tools. Additionally, there are sundries such as tea, coffee, and toilet roll.

office equipment

Training

Training costs include time spent internally informing a new employee about what is expected of them in their role, or it could be external training needed for them to perform their tasks. Engineers, for instance, are likely to need bespoke training to safely work on specific machinery, plus regular refresher courses to properly cover health and safety in accordance with the latest regulations.

Salary

Payroll cost per employee depends on the wage or salary that has been agreed. The average salary in the UK at the time of writing is around £30,000, but of course, this depends entirely on individual job roles and companies.

Pension

The UK has a workplace pension scheme which requires employers to pay a minimum of 3% of an employee’s salary – as long as the employee has opted-in to the scheme. Some employers choose to pay more than this.

Employer’s National Insurance Contributions (NIC)

Employers pay a NIC for each employee according to the salary the employee is paid. For the 2019-2020 tax year, this is at a rate of 13.8%. For employees on a low salary (less than £719 per month), employers are exempt from this charge.

Expenses

The cost of expenses will depend entirely on company arrangements. In cases where employees are working cross-country which requires overnight stays in hotels and dining out, some companies reimburse the employees at a capped amount. This could be something like £10 for an evening meal.

employee expenses

The most common instance of expenses is fuel. Should a member of staff be asked to travel somewhere for a work-related reason, the company would likely repay them for fuel and possibly wear and tear of the vehicle.  This is usually based on a per-mile rate.

Bonuses

Bonuses are paid at the discretion of the business owner. It is common for employers to pay their staff an annual bonus either at Christmas, around the new financial year, or on the anniversary of their start date. Bonuses usually depend on how the company and individual staff have performed throughout the year.

Company Vehicles

If an employee uses a company vehicle their expenses quickly rise. It could be anything from a work van to the latest model of a prestige marque car, and the company will usually pay the lease costs – which often include maintenance – and for insurance of the vehicle.

Medical Benefits

Medical/dental insurance is another benefit that some employers offer their staff. Depending on how comprehensive the cover is, this is likely to cost upwards of £400 per employee per year.

Cost of Employee Calculator

To calculate the average cost per employee, an employer needs to consider all of the aforementioned aspects – not just the payroll cost per employee. As an example, we have put together the below calculation based on an employee who is paid the average UK salary of £30,000. *Please note that all of these costs are approximate and might not reflect the true cost at your business.

*Initial Costs
AreaItemCost
RecruitmentAgency Fee (15%)4500.00
 Interview Time: Internal 2 hours @  £14.4228.84
TrainingInternal: 5 hours @  £14.4272.10
EquipmentHardware1000.00
 Desk400.00
 Chair200.00
 Stationary30.00
Total 6230.94

 

*Annual Costs
AreaItemCost
OverheadsAll Utilities7200.00
Softwareincluding IT support840.00
Salary 30000.00
Pension3%900.00
Employers NIC13.8%4140.00
ExpensesNone0.00
Annual Bonus 500.00
Company VehicleNone0.00
Medical BenefitsNone0.00
Total 43580.00
Monthly 3631.66

 

These tables can be used for any work environment, simply enter any amounts (as best you can) into each field to work out the total cost.

How much does it cost to employ someone on minimum wage?

Conversely to the above guide for an experienced employee in an office, an employer in retail, for example, could hire an inexperienced worker on minimum wage to work full time for a much lower amount. Costs like employer’s NIC and pensions would still need to be paid, however the lack of recruiter fees, equipment and software – among other items – make the cost much lower.

 

 

Understanding payroll cost per employee can be a considerably complex undertaking, and some businesses may not have the time or resource to apply to this area. It’s important to thoroughly appreciate how much a member of staff is costing you, and one way to accurately record such information is with comprehensive, integrated HR and payroll software. Speak to the team at FMP for further information about our software, FMP Amity.