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The Real Cost of Labor

The direct and indirect costs of recruiting, onboarding, training and maintaining your crew

Since we make no secret about the rates we charge our clients or what we pay our crew members, we are often asked to explain the delta between the two amounts. For those unfamiliar with those rates, the average sell rate is roughly 40% over the pay rate. Depending on the role and dynamic costs such as Workers Compensation Insurance, this is not an unreasonable amount. Typically, when those questions arise, the conversation is clarifying, rather than justifying, what is often mistaken as gross profit.

Truth is, and any business owner with one or more employees knows this to be true, the cost of labor can be stifling, especially in states with high minimum wages, mandatory benefits, and strict definitions pertaining to 'who is a contractor.' Less talked about are the indirect costs of labor, which can go so far out of control that many employers and contractors are overwhelmed by the challenges they face.

We publish this article to more completely explain the actual costs that are involved in maintaining a full-time, part-time and contingent workforce, the direct costs such as payroll, employer taxes, benefits and insurance to indirect costs such as processing expenses, operating costs, invoice exceptions, and time-theft. We'll touch on the pros and cons of using an independent payroll service, managing a contingent workforce and the increased regulatory compliance. In the end, any average company will have the resources to analyze the cost to benefit when deciding their optimal workforce mix.

NOTE: As you read on, be mindful that all companies, and even entire industries, will have major and subtle differences in their business model, culture and/or vision statement - all of which can influence or adversely impact the cost factors described below. Equally important to consider, some organizations will have a higher tolerance for risk, reside in states with more or less regulation, are subject to more or less oversight, or simply have a shallow talent pool - but for the most part, this article is applicable to a broad range of California employers, from any industry, and does not pertain strictly to the live event industry.

Direct Costs

Direct Costs are those expenses directly connected or associated to the wages earned by an employee or contractor. These are the costs that quickly come to mind when you think of Cost of Labor, such as the taxes, processing fees, benefits and liabilities.

Payroll Expenses

  • Employee Payroll / Contractor Fee: This is the sum amount of the monies owed to the employee or contractor. This can be an hourly-rate, day-rate or flat rate - although there are some rules that must be followed when calculating flat-rates to ensure that regardless of the agreement, the amount paid is higher than the applicable minimum wage.

  • Payroll Tax: This includes the employer contribution for federal, state and local taxes and government insurance, such as Medical and Unemployment. The employer contributions for Federal include Social Security (6.2%), FICA (1.45%), FUTA (0.6%) and in California, the SUTA for new employers (3.4% for new California employers), plus any local or municipal taxes.

  • Job Expenses: Costs accumulated by company personnel at the job-site, such as parking & tolls, crew meals, equipment rentals and expendables, etc.

  • General Liability Insurance: A policy limiting your company’s liability for claims made resulting from an accident caused by one of your employees. In some cases, you can request freelance contractors indemnify you and name you as Additional Insured on a policy they may carry. But less established techs rarely carry their own liability and therefore must be covered under yours, as necessary. And employees are automatically indemnified by their employer, except in cases where the employee acted in a fraudulent manner or in violation of applicable laws without employer knowledge.

  • Workers Comp Insurance: Insurance providing disability benefits as wage replacement and medical care and benefits to employees injured in the course of employment in exchange for relinquishment of their right to sue your company for negligence. This insurance is mandatory for all employees, whether part-time or temporary - and if your contractors fail to provide their own workers comp insurance, for many jobs the contractor must be covered by your company’s policy. Failure to do so could result in the contractor filing a claim against your end-client’s policy - which won’t go over too well with most end-clients.

  • Commercial Auto Insurance: If you’re going to have a contractor or an employee drive vehicles, like trucks, cargo vans, passenger fans or even their own vehicle to run and pick up supplies, commercial auto insurance provides protection from liability, injury or collision damage if they get into an accident. And be careful to read the fine print on your rental truck agency agreements. It’s a misperception that your personal auto insurance will cover your rental van. Where they may be true as you drive it away from the lot, the moment you put people or gear in it that’s work related, most policies won’t cover an accident or the costs of collision damage, theft, property loss, personal injury, medical expenses or possible punitive damages.

Processing Expenses