Question:
How much is fringe, and how do I use it to account for labor cost?
– Chef
Answer:
Fringe benefits represent the costs of an employee beyond their wages. This might include required costs such Medicare tax, social security tax and paid sick days (in some municipalities) as well as voluntary benefits like employer contributions to retirement plans, healthcare and paid time off.
Calculating fringe benefits is important in providing more accuracy in labor costing. For example, let’s imagine you are debating whether to open on Monday evenings for dinner service and are calculating what your expenses would be to run a lean kitchen of a sous chef ($52K/year or $25/hour), two cooks ($20/hour and $18/hour) and a dishwasher ($15/hour) on that night. Adding up their wages will give you a cost of $78 per hour in labor to run your kitchen on Mondays. But those wages just represent what goes to employees.
Imagine that your sous chef has benefits like retirement, healthcare and paid time off commensurate with his salaried position. Hourly employees may have a less generous benefits package, but let’s say they still accrue sick days and you offer reduced cost health insurance with an employer contribution. Such benefits, or fringe, may add a significant percentage to the overall compensation you are providing to your employees. Let’s imagine 20% for full-time salaried employees and 10% for hourly employees to use simple numbers. With that fringe added, staffing your kitchen on Mondays actually costs just over $88 per hour. While the $10 difference may seem minor, it will add up to over $4,000 annually. To leave it out of your calculations could lead to the wrong decision for your operation.
To calculate fringe, you would add all of these benefits and ascribe it an hourly rate to add on, usually separate rates for hourly and salaried employees.
Where fringe gets tricky is that there is no set number. It’s different for every restaurant and even for different employees within the same operation, depending on the benefits they are offered or select.
Beyond the managerial tool of using fringe benefits in costing, they also have important tax implications. As always, consult with your accountant and attorney.
More on calculating fringe benefits here.