Labor Agreements: Definitions
There are no complex formulas in these models. There are, however,
some terms which should be specified for the sake of clarity:
- Payroll Costs: Payroll costs are the money that appears
as "gross pay" to employees. It includes base pay,
overtime and shift premiums, vacation and holiday pay, and severance
pay. All of these are calculated by the same formula:
- EARNINGS = #EMPLOYEES * #HOURS * #WEEKS * PAY RATE
- All pay rates are expressed in dollars-per-hour.
- Straight Time: Straight time is the base pay times
the number of hours worked. It is divided into two sections,
the regular (40-hour) workweek and straight-time overtime.
- Overtime Premium: Overtime premium is the additional
rate an employee earns for working more than a regular daily shift
or a regular week.
- Shift Premium: Shift premium is the additional rate
an employee earns for working a regular afternoon or evening shift.
Shift premium is usually independent of overtime premium.
- Holidays & Vacation: Holiday and vacation are
not an additional rate attached to an employees paycheck. Rather,
they represent the cost of hiring a replacement when an employee
takes a paid vacation or holiday. Holiday pay is frequently charged
at a higher rate than base pay. Sometimes it will not be necessary
to hire a replacement for an employee on vacation or on holiday;
enter only the vacation and holiday time which will be replaced.
For your own records, you should keep track of the percentage
of vacation time that is being replaced (if you don't need to
replace vacationing employees, you may be overstaffed). Also notice
that vacation and holiday time are calculated in number of
weeks. One day of a five-day week is 0.20 weeks; one day
of a four-day week is 0.25 weeks.
- Severance Pay: The contract may stipulate that, upon
termination of employment or upon retirement, severance pay may
be due, based on the number of years of service. This item may
vary from year to year; it is a difficult cost to estimate.
- Fringe Benefits: In addition to payroll, an employer
usually incurs "add-on costs," or fringe benefits.
Some are required by law; others are subject to negotiation.
These costs are only the costs to the employer; employee's contribution
is not included.
- Statutory Insurance: State and Federal laws generally
require three insurance programs: social security, workers compensation,
and unemployment insurance. The rates for these programs change
frequently; some have "caps" (maximum payments), some
do not, and some have caps that are high enough that they can
be ignored. For instance, at this writing social security is
7.05% of gross pay, to a limit of $39,600. The worksheet calculates
social security and workers compensation by multiplying the rate
(a percentage) by the total payroll (a dollar amount); unemployment
is calculated by multiplying the rate by the number of employees.
If enough employees exceed the income limit for one or more of
the statutory programs, calculate the excess earnings and subtract
that amount from the entry for the total payroll for the affected
program.
- Other Fringe Benefits: In addition to statutory insurance,
the worksheet also provides entries for health insurance, group
life insurance, and pensions. Health and life insurance are calculated
by multiplying the rate by the number of employees; pensions are
calculated by multiplying the rate by the total payroll.
- Historical and Actual "Add On" Costs: Since
so many of the fringe benefits are based on total payroll, an
increase in payroll will also affect fringe benefits. This is
often called "package roll-up," or "add-on costs."
The worksheets calculate the add-on costs in two ways:
- Historical Add On Costs is the ratio of the current
fringe benefit package to the total current employment cost.
This ratio is useful for making a quick estimate of the indirect
costs of a payroll increase.
- Actual Add On Costs is the ratio of the proposed fringe
benefit package to the total cost of the proposed contract.
© 1996 A.J.Filipovitch
Revised 15 November 96
