On-costs

On-costs are the additional costs an employer incurs to employ a person, over and above the base salary or wage. They are the gap between what the employee sees on a payslip and what the employer actually spends, and they are routinely much larger than employers — and almost all employees — expect.

What on-costs typically include

Payroll-related taxes and levies — employer-side payroll tax, social insurance contributions, and similar charges levied on the wage bill.

Mandatory retirement or pension contributions — employer contributions to retirement schemes, often a fixed percentage of salary specified by legislation.

Workers compensation insurance — premiums to cover injury and illness in the course of employment, typically a percentage of payroll.

Other compulsory insurances — liability, group life, or income protection cover required in some jurisdictions or industries.

Paid leave — annual leave, public holidays, personal or sick leave, and parental leave. The cost is the salary paid for time not worked.

Benefits and allowances — health insurance, retirement top-ups beyond mandatory levels, transport allowances, education subsidies, and similar.

Equipment and workspace — laptop, phone, software licences, office space, ergonomic equipment.

Training and development — onboarding cost, ongoing professional development, certification fees.

Recruitment cost amortised — the cost of hiring spread across the expected tenure of the employee.

How large the gap can be

Across most developed labour markets, fully loaded on-costs typically run at 20–40% of base salary. A $100,000 base salary often represents a $130,000–$140,000 employer cost when on-costs are included.

The breakdown varies by jurisdiction. Markets with high mandatory pension or social insurance contributions sit at the top of that range; markets with lighter mandatory loadings sit at the bottom.

Why it matters

Several decisions hinge on understanding on-costs accurately:

• Salary vs contractor decisions — a contractor with no on-costs may charge a 30% premium on equivalent salary and still cost less than an employee. The break-even contractor rate cannot be calculated without an on-cost figure.
• True cost of hire — budgets that use base salary alone systematically underestimate the cost of headcount additions.
• Margin analysis — service businesses where labour is the dominant cost cannot accurately price their work without including on-costs.
• Employee value proposition — employees who see only base salary often undervalue the package; communicating total cost of employment can shift perception meaningfully.

A common mistake

The single most common error in on-cost analysis is to count only the most visible items — typically retirement contributions and payroll tax — and ignore leave loading, equipment, training, and recruitment amortisation. Each of these is small individually but the aggregate is rarely less than 5–8% of salary, which moves the total out of the 20–25% range and into 30–40%.

For a complete picture of employee cost, every cash and non-cash component the employer pays as a consequence of the employment relationship should be allocated to the role.