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 11 March 2005