Labor burden is what an employee costs beyond their wage. Most calculations get the first half right and the second half wrong. Here is the full method, in ratios that work in any currency.
Labor burden is everything an employee costs you on top of the wage you pay them. Employer taxes, pension, insurance, tools, vehicle, training, and their share of running the business.
Most guides stop there and give you a percentage: add twenty-five to forty per cent on top of the wage and you have your burdened rate.
That number is not wrong. It is half finished.
The other half is what you divide by. And almost every calculation you will find divides by the hours you PAY for rather than the hours that actually produce something you can invoice. Those are two very different numbers, and the gap between them is where profit goes to die quietly.
Do both halves properly and the honest figure lands at roughly twice the wage on the payslip — not one and a third.
Employer taxes, holiday entitlement, insurance and pension rules differ in every country. A worked example in one currency is useless to a reader in another, and misleading to a reader who assumes the percentages transfer.
So everything below is expressed as a multiple of the base wage. If you pay someone 1.00 an hour, the figures show what that person actually costs per productive hour. The units are yours. The method does not change.
Start with what leaves your account because this person exists.
Direct costs sit close to the wage and are easy to find: employer taxes and social contributions, pension or retirement contributions, insurance, tools and protective equipment, workwear, a phone, a vehicle and its fuel, training courses and certification fees.
Add those up across a year and, for a typical hands-on role, they usually come to somewhere between a quarter and a third of the wage bill. Call it 0.30 on top of every 1.00 you pay. That is the figure most published calculators produce, and as far as it goes, it is correct.
Then there is the part that gets skipped.
Your office. Your yard. Your accountant. Your software. Your insurance policies. The person who answers the phone. The supervisor who does not lay a single brick. Your own time when you are quoting rather than working. None of it appears on any invoice you send. All of it is paid for out of the hours your productive people sell.
Divide your total annual overhead by the number of people who actually generate revenue — not by headcount. If you have twelve staff and eight are producing, those eight carry the whole building.
For a small business, that share commonly lands somewhere near 0.38 for every 1.00 of wage. Bigger overhead, fewer producers, higher number.
Running total: 1.00 in wage becomes 1.68 in annual cost.
Here is where nearly everyone stops thinking.
A full-time year is around 2,080 paid hours. Forty a week, fifty-two weeks. It is a tidy number and it is genuinely useful — for payroll. It tells you how many hours you are obliged to pay for.
It tells you nothing about how many hours turn into an invoice.
Subtract your way down and see what is left. Statutory holiday and public holidays. Sick days. Training days and inductions. Travel between sites. Setting up in the morning and packing down at night. Waiting for materials that did not arrive, for weather that did not clear, for a client who had not decided. Redoing work that was done wrong the first time.
None of that is idleness. It is the ordinary friction of running a business, and it is unavoidable. But it is time you pay for and cannot bill.
For most hands-on roles the productive share of the paid year comes out around seventy per cent — call it 0.72. Contract definitions used in the real world put it near 1,550 hours; published research on office work puts the focused share lower still. A mobile team covering four sites a day can drop under 0.62. A workshop role with materials always to hand can reach 0.80.
Your own number is the one that matters, and finding it takes ten minutes. Take last month. Count the hours you paid for. Count the hours that appeared on an invoice. Divide the second by the first. Do it for three months and you have a figure worth more than any industry average.
Four different answers to the same question, for the same person:
What the payslip says 1.00 Wage plus direct costs, over paid hours 1.30 Wage plus direct costs, over productive hours 1.81 Fully loaded, over productive hours 2.33
The second line is what most calculators give you. The fourth is what the person actually costs.
The distance between them is not a rounding error you absorb with a good month. It is a factor of nearly two.
Suppose you quote work at 2.00 for every 1.00 of wage — which feels generous, and which most people in trade would call a healthy markup. Against the payslip you feel like you are doubling your money. Against the standard burdened rate of 1.30 you still feel comfortable.
In reality you are selling at 2.00 something that costs you 2.33. You lose on every hour worked, and the busier that job keeps you, the faster you lose. This is the exact mechanism behind a full order book and an empty bank account — and it is why a business can grow its way into trouble.
When you quote. The rate you feel comfortable asking for is almost always well below the rate you need, because the number in your head came from the payslip. Fix the number and the discomfort disappears — you stop guessing and start reading.
When you hire. Someone asking for ten per cent more does not cost you ten per cent more. Across a year of productive hours, with their overhead share attached, it is closer to twenty-three per cent. Worth paying if they are worth it. Worth knowing either way.
When you decide between doing it yourself and subcontracting. A subcontractor's price already contains their own version of this arithmetic. Comparing their rate to your payslip figure will always make them look expensive. Comparing it to your fully loaded rate sometimes shows the opposite — and that comparison is the only one that means anything.
When you decide who stays. Two people on identical wages can cost very different amounts, because they do not produce the same number of billable hours. The one who travels less, waits less and redoes less is cheaper per hour of output even on higher pay. Measured per productive hour, that difference is visible. Measured per payslip, it never is.
I have spent decades running service businesses: heavy industry and shipyards, construction, facility management, pest control, logistics, food and restaurants, automotive, property. Teams over a hundred people, across more than forty locations. Different trades, different margins, different customers, different everything.
For years I assumed each industry had its own formula. That is what everyone tells you, and it is comfortable to believe. Then I put the organisation charts side by side and found the same thing every time: the median market price could not be justified against what the work actually cost, unless you pretended that every paid hour was a productive one.
The more varied the list got, the harder it became to believe that each trade was a special case. It was the same arithmetic wearing different overalls.
Nobody was lying. They were dividing by the wrong number, and so was I, until it cost me enough to notice.
The percentage on top is the easy half. Everybody gets it roughly right. The hours underneath are the half that decides whether you made money this year.
Should I include myself?
If you bill hours to clients you belong in both halves. If you mostly run the business, your cost belongs in overhead and gets shared out. Most owners are some of each — split by how your week actually divides, and be honest about it.
Isn't overhead already in my quotes as a separate line?
It might be. In that case pick one method and keep it. Either overhead lives inside your hourly cost or it sits as a line on the quote. Counting it in both places inflates your price and loses you work you should have won.
My productive share changes every month. Which do I use?
A rolling twelve months for pricing, so one bad winter does not distort your rates. The monthly figure for spotting problems. A month far below your annual average is telling you something specific about that month, and it is usually worth chasing.
The number came out frighteningly high. Is it wrong?
Probably not. Almost everyone's first honest calculation is higher than expected — which is precisely why it is worth doing. Check for double-counted overhead, and check you have not subtracted the same lost time twice. If it survives both checks, that is your number, and you have been pricing against a fiction until now.
Work it out once by hand. Then stop doing it by hand.
The Employee ROI Calculator runs this arithmetic for your whole team, on every job, automatically — real cost per productive hour, margin before you sign, and what a job is doing while it is still running. A free licence gives you the full application for one job every thirty days. No card.
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