Direct and indirect employment come with their pros and cons, and most companies have a mix of both depending on their priorities. Whether you're a startup thriving on flexible work conditions or you're a multinational company on the hunt for specialized skills, you're likely to have a mix of direct and indirect employees on your payroll.
Elaborate and effective compensation consulting makes calculating and managing labor costs for direct and indirect employees a breeze. Read further to learn more about direct and indirect employment, how to calculate labor costs for each of them, and how compensation consulting can help with your compensation planning, design, and implementation!
Direct employees are individuals who are directly employed by a company and have a formal employment contract with the organization. They are typically considered full-time or part-time employees, and they receive benefits and are eligible for bonuses and promotions. Examples of direct employees include managers, administrative staff, and production workers.
On the other hand, indirect employees, also known as contract employees or outsourced workers, are not directly employed by the company but are contracted to provide services to the organization.
They are typically considered temporary or contract workers and do not receive benefits or other perks that are typically offered to direct employees. Examples of indirect employees include independent contractors, temp workers, and hr consulting services.
Labor costs for direct employees can vary depending on the location, type of industry, and other factors, so it's essential to use accurate information. When making the calculation, here are two common ways of calculating labor costs.
One way to calculate labor costs is to multiply the hourly wage by the number of hours worked, plus benefits and other forms of compensation.
Labor cost = (Hourly wage or salary) x (Number of hours worked) + (Benefits and other forms of compensation)
Another way of calculating labor costs is to determine the sum of all wages, salaries, bonuses, benefits, and other forms of compensation paid to an employee.
Labor cost = (Total wages) + (Total salaries) + (Benefits and other forms of compensation)
Labor costs for indirect employees, also known as contract labor or outsourced labor, can be calculated in a similar way to direct employees. The main difference is that with indirect employees, the company is typically only responsible for paying the employee's hourly rate or project fee and does not provide benefits or other forms of compensation.
It's important to keep in mind that if any expenses are incurred while working with the indirect employee, such as travel or materials, these should be included in the calculation as well.
When calculating labor costs for indirect employees, it's also essential to factor in any additional costs, such as recruitment, training, and other expenses associated with finding and hiring contract workers.
Below are the methods used for calculating labor costs of indirect employees:
One way to calculate labor costs for indirect employees is to use the following formula:
Labor cost = (Hourly rate or project fee) x (Number of hours worked or duration of the project)
Another way of calculating labor costs for indirect employees is to get the sum of all wages, salaries, bonuses, benefits, and other forms of compensation paid to an employee.
Labor cost = (Total wages) + (Total salaries) + (Additional costs)
Whether your organization hires direct employees, indirect employees, or a mix of both, it pays to get help from trustworthy salary consulting experts . Our compensation analysts at FutureSense make sure that your calculation of labor costs is accurate and that your compensation is not only competitive, but also follows labor rules and regulations.
FutureSense is a consulting firm that offers end-to-end compensation consulting services. With our people solutions, we help companies come up with strategies that help them achieve their objectives as well as prepare for the future.
Learn more about our services and how we can help you with your labor costs. Reach out to FutureSense today!