Recently we were asked by a licensee to develop a new rate model in a non-union worker environment. The objective was to build a rate model that represented the actual average industry costs to perform the work and to provide commentary on the competitiveness of those costs.

We spent the most time understanding and building the labour component of the model. The most interesting parts of the labour model is all the statutory expense requirements an employer is required to incur when employing workers. The cost goes far beyond the base hourly wage agreed between the employer and the employee.

The extra costs beyond the wage are often called payroll loading or payroll burden. The term is used to describe the extra costs beyond the base wage and statutory required overtime that an employer incurs. In British Columbia these costs include Vacation Entitlement, Statutory Holidays, Canada Pension Plan, Employment Insurance, WorkSafeBC Premiums, Extended Medical Benefits, and Pension Plans.

The following scenario illustrates an assumption of an Interior logging employee working 12 hours per day for 180 days per year for 2,160 hours per year.

 

Overtime

There are a lot of regulations and variances under the Employment Standards Act regarding overtime, especially for loggers. This is not meant to exhaustively examine the differences but to present a scenario of a common overtime situation.

Overtime for non-union workers engaged in logging activities in British Columbia are affected by their geographic location of operation. Workers classified as Interior loggers are capped at maximum 1.5 times base wage for overtime while Coastal loggers are capped at maximum 2 times base wage for overtime.

Interior Coastal

<= 8 hours per day AND <= 40 hours per week

1x base wage

1x base wage

> 8 hours per day AND <= 12 hours per day AND > 40 hours per week

1.5x base wage

1.5x base wage

> 12 hours per day 1.5x base wage

2x base wage

A typical logger working 12 hours per day at a base wage of $30/hour would earn $420/day in wages ($30/hour * 8 hours = $240 + $45/hour * 4 hours = $180) for an effective average wage of $35/hour.

 

Statutory Holidays

British Columbia has ten statutory holidays – New Year’s Day, Family Day, Good Friday, Victoria Day, Canada Day, B.C. Day, Labour Day, Thanksgiving Day, Remembrance Day, and Christmas Day. Some organizations also recognize Easter Monday and Boxing Day as statutory holidays but they are not actually statutory holidays.

All but one of these days – Victoria Day – falls within the typical Interior working season which means workers are entitled to either extra pay if they work the statutory holiday or paid time off either on that day or another day in lieu. Either way, it is a cost to the employer. Statutory holiday pay is calculated on the average worked day’s pay in the prior 30 calendar days if time off is provided or the average worked day’s pay times in the prior 30 calendar days plus 1.5 times factor if required to be worked.

Our typical logger would get paid for nine statutory holidays during the year at a cost of $420/day. Based on the scenario hours worked per year, this results in $1.75/hour statutory holiday cost.

 

Vacation Entitlement

Vacation entitlement is a statutory requirement after five calendar days of employment. The minimum vacation entitlement is at least four percent (4%) of total wages, including overtime, for up to five years of employment. After five years, the minimum vacation entitlement is at least six (6%) of total wages.

Vacation entitlement is also payable on statutory holiday pay.

A typical logger has more than five years of employment which means they are required to be paid 6% of total wages in vacation entitlement. Whether paid out every payday or accumulated as vacation payable, the employer has to pay the worker $25.20/day or $2.10/hour in vacation pay.

 

Canada Pension Plan

The Canada Pension Plan is a mandatory pension plan which is paid 50% by employees and 50% by employers. Employee CPP contributions are deducted on each pay and remitted to the government at the same time as the Employer’s CPP contributions. The employee and employer each contribute 4.95% (2016) of earnings to a maximum of $2,544.30 (2016) each per year.

Our typical logger earns $84,142.80 per year ($445.20/day * 180 working days + $445.20/day * 9 statutory holiday days) so therefore exceeds the maximum contribution rate so the employer’s CPP cost is $2,544.30 per year or $1.18/hour.

 

Employment Insurance

Employment Insurance is also a mandatory program which is paid 42% by employees and 58% by employers. Employee EI contributions are deducted on each pay and remitted to the government at the same time as the Employer’s EI contributions. The employer contributes 2.632% (2016) of earnings to a maximum of $1,337.06 (2016) per year.

Our typical logger’s earnings would exceed the maximum employer contribution rate so the employer’s EI cost is $1,337.06 per year or $0.62/hour.

 

WorkSafeBC Premiums

The cost of safety goes far beyond the regulatory requirements of the workers’ compensation requirements administrated by WorkSafeBC. This section only addresses the premiums required to be paid on employee wages.

The Integrated Forest Management classification unit (703008) applies to contractors involved in full phase harvesting activities. The base premium rate is 9.75% (2016) with maximum assessable payroll per worker of $80,600 (2016). Businesses can have a surcharge or discount to the base premium rate based on their experience rating adjustment with WorkSafeBC. For our purposes, the employer is assumed to have a neutral experience rating adjustment and would pay the base premium rate.

Our typical logger’s earnings would exceed the maximum assessable payroll per worker so the employer’s WSBC cost is $7,858.50 per year or $3.64/hour.

 

Extended Medical Benefits

Many, if not most, non-union contractors provide an extended medical benefit program to their employees. This practice is a fairly standard practice of established businesses across many industries as a retention and attraction tool. Benefits plans can vary in pricing depending on what is offered and any allocation of payment between employers and employees. It is common for employers to pay between 50% and 100% of extended medical benefits for their employees.

For the purposes of this section, it has been assumed that the employer pays a set fixed amount per year for extended medical benefits for each employee. Depending on the coverage of the program, the illustrated amount could be between the 50% and 100% common range of payment.

The typical extended medical benefits program costs the employer $2,500 per year and is partially or fully paid by the employer on behalf of the employee. Based on our typical logger’s work schedule, this is equivalent to $1.16/hour.

 

Pension

It has become fairly common for certain types of contractors to pay a pension contribution to long-term employees as an attraction and retention policy. This is typically paid directly into a Registered Retire Savings Plan account owned by the employee. It is effectively equivalent to a defined contribution pension plan arrangement.

The strategy of how the pension contribution is calculated varies between contractors. For the purposes of this illustration, it has been assumed a fixed annual contribution is paid by the employer.

The typical pension program costs the employer $5,000/year. Based on our typical logger’s work schedule, this is equivalent to $2.31/hour.

 

Summing It Up

All of these statutory and typical employment costs are interesting, but what does this mean to the payroll loading costs? Well, quite a lot actually. The table below puts it all together and sums up the costs.

 

Hourly Annual

Base Wage

$30.00

Effective Wage (inc. OT)

$35.00

$75,600.00

Statutory Holidays

$1.75

$3,780.00

Vacation Entitlement

$2.21

$4,762.80

Canada Pension Plan

$1.18

$2,544.30

Employment Insurance

$0.62

$1,337.06

WorkSafeBC Premiums

$3.64

$7,858.50

Extended Medical Benefits

$1.16

$2,500.00

Pension Contributions

$2.31

$5,000.00

Total Employer Cost

$47.86

$103,382.66

Payroll Loading

36.7%

Taking the Effective Wage as the starting point – so base wage including overtime – then payroll loading for our typical logger is 36.7%. Even if an employer does not pay the optional Extended Medical Benefits and Pension Contributions, statutory payroll loading is still 26.8%.

For most fully mechanized contractors, the greatest annual cost they face in their business is the cost of fuel. The second greatest cost is labour that typically account for at least 25% of total contractor revenue. In lower fuel price cycles, labour can actually be the highest individual cost.

A contractor needs to understand their full labour costs, including the payroll loading, when negotiating rates, bidding on work, or offering wages to new hires. Every 4% in fully loaded labour costs is 1% from a contractor’s bottom line.

 

Impact of Not Knowing Actual Payroll Costs

It is common to see contractors assume 20% payroll loading when negotiating rates. Consider the following example for a contractor that believes their payroll loading is 20% and works on a model of 10% markup on their rates:

Start

Actual payroll loading

36.7%

Less

Assumed payroll loading

20%

Equals

Payroll loading gap

16.7%

Multiply

Labour as percentage of revenue

25%

Equals

Percentage of revenue in loading gap

4.2%

Target

Profit margin

9.1% (10% markup)

Equals

Percentage of profit in loading gap

46%

The example contractor would have negotiated almost half of their intended profit before they ever started on the project. This can be devastating to a contracting business in the forest industry.

 

Conclusion

Know your costs. And benchmark your costs against your peers in and out of the industry regularly to make sure your business is competitive. Going into rate or wage negotiations with your eyes wide open can save your business from difficulties in the future.