The Dr. Is In: The Pig-Pen Effect
While I was speaking at a recent trade show, an attendee came up to me and said he was concerned about his profit—aren't we all!
He said that when he had only a handful of employees, he knew he was making good money. But as soon as he started increasing his workforce, he stopped making a profit. While the economy was in a slump, he had to lay off some of his employees. But now that the economy is improving, he is concerned that he needs to build his work force again. And he doesn't want to repeat his mistakes. I assured him that this was a common lament among many in our industry.
Consider Your Costs
Do you remember Pig-Pen, the character in the Peanuts cartoon strip? He was the kid who always had a cloud of dust around him. Your employees are like Pig-Pen. I'm not saying they are dirty, but wherever your employees go, a cloud of costs follows them. These added costs are called labor burden—they represent the additional burden of hiring employees. And they can be quite significant.
Most owners are aware of the standard burdens such as payroll taxes and workers compensation. Another typical burden is liability insurance. The majority of liability insurance policies are based on the total gross payroll. As your payroll grows, so does the cost of your liability policy. Even if your liability policy is based on total revenue, when your revenue grows, you typically hire more employees. Therefore, liability insurance is related to your total payroll and should be considered a burden.
Let's look at a sample employee who is paid $25 per hour. If you add some sample percentages for payroll taxes, workers' compensation and liability insurance, you can see that it now costs you $34.50 per hour to pay that employee.