Burden RateExplained & Defined with Examples

Written By:
Adiste Mae

What is the Burden Rate?

The burden rate is used to compute the rate of costs other than the employee’s basic compensation for services provided or for product inventory items.

These other costs can be the agreed benefits of an employee such as the paid vacation and sick leaves, performance bonus, health insurance, or any other indirect costs incurred in maintaining or for career improvement of an employee such as training, business conference fees, etc. 

The burden rate is the overall costs (direct and indirect) of an employer in hiring an employee and not just the payroll cost and must not be confused with the tax burden of a firm or an individual.  

Here are a couple of example burden rate formulas:

Labor Burden Rate = Indirect Costs / Direct Payroll Costs

Overhead Burden Rate = Material Expenses / Production Total

How the Burden Rate Works

The importance of computing the burden rate is to get the most realistic profitability rate and efficiency of each worker after considering all costs incurred in hiring an employee.

When firms calculate only the salary expense, it may not give them the true net profit amount.

It can cost the employer as much as expected, usually 50% higher than the payroll cost,  because of the burden rate. 

The Burden Rate is also considered the hidden cost of maintaining employees.

Included are other liabilities above the employee costs such as insurance, paid leave, and other benefits. 

Required Burden Rate Cost

The required burden rate costs are the costs that are stipulated in the labor code such as social security benefits, health maintenance insurance, mandatory payment of taxes on compensation, and other mandatory insurance for an employee’s risk-related job in the state the business is operating in or the federal government. 

Other obligatory expenses may be added depending on the company size.

The larger the company size, the stricter regulations can be imposed, and additional employee-related security costs may be imposed as well. 

The burden rate may differ from one state to another and because of this, certain costs may vary drastically depending on where the business will operate.

For this reason, businesses try to gather as much information as they can before they make a decision on where to operate. 

Optional Burden Rate Costs

One of the topmost agendas of a company is cost minimization and while there are mandated burden rates that companies must comply with, there are also burden rates that could be minimized if not completely eliminated.

At the discretion of the company, they can choose to add an optional burden rate to their overall costs such as other health care plans which do not include mandatory health insurance benefits like dental care, vision care, prescription drug programs, and retirement benefits. 

Other services and wellness programs provided by the company also add to the burden rate such as employee training, wellness activities, uniforms, business trip expenses, etc.