If you asked a number of companies about the two main factors that contribute to their growth, chances are high you’d hear “working with top talent” and “keeping operational costs under control”. It’s safe to say, however, that both of these objectives have become more challenging to keep up with in the last few years.
For starters, businesses now fight for highly skilled talent not only locally but also with companies worldwide. One of the ways to win over an employee, on top of an attractive salary, is to offer a generous fringe benefits package. At the same time, businesses must also be careful when growing employee costs, as inflation has reached double digits in many countries.
Is it possible to balance out these two seemingly contradictory factors? Yes. Read on as we explain:
what fringe benefits are
how to calculate their total costs for your business, and, finally
how you can create an attractive fringe benefits package while lowering the costs for your business
What are fringe benefits?
Fringe benefits are all the extras that companies offer their workers on top of their salary. Depending on the organization, some fringe benefits may be offered to all employees, while others might be given to just a designated group. For example, everyone at the company might be covered by private health insurance, but those in managerial or C-level positions might also include family coverage in their plans. Or, everyone living further than within a 30 km radius of the office might receive an additional stipend for their train tickets or fuel.
Overall, fringe benefits are geared towards:
Boosting employee satisfaction levels, which leads to better talent retention
Compensating staff for any costs related to their jobs
Motivating employees to do their best work
Attracting and recruiting top-skilled talent by standing out from other potential employers
Are statutory benefits a part of fringe benefits?
The best answer here is the much-dreaded “it depends”.. If you were to run a quick search online, you’d see that some sites use the term exclusively for all the extra perks like yoga classes, 13th month salary, or on-site lunch, while others use it for every single benefit, including those required by law.
Essentially, it’s up to each company to decide if they want to break down obligatory and additional benefits or calculate them jointly. In this piece, we’ll follow the latter approach and use the term “fringe benefit” to refer to all remuneration other than the salary stated on the contract. This will help make sure that you don’t leave out any benefits-related costs when you calculate your fringe benefits rate.
Common fringe benefits offered by employers
To give you a sense of what fringe benefits might look like in real life, let’s take Germany as an example.
Here are some of the statutory benefits required by law:
Paid leave – anyone working five days a week is entitled to 20 days of paid leave, while those on six-days-a-week contracts get 24 days. This does not include national holidays, which average another seven days in a year, depending on the state the employee is based
Sick leave of six weeks a year (during this time, they’re paid 100% of their salary)
Parental leave – six weeks prior to the due date and up to 12 weeks after birth for women, and 24 months for both parents in the child’s first three years of life
Pension and insurance contributions, paid 50/50 by the worker and employer:
As for additional benefits (so, those designed solely to retain and attract employees), these tend to be similar regardless of location (i.e., they’re not unique to Germany). Many companies offer:
Private healthcare plans, including dental and vision
Additional pension insurance
Conference & education stipends
Flexible work schedule and remote work
Company stock options
Company car (sometimes, available for not just work but also private use)
When listing out all the benefits you offer, remember to look into each country’s statutory benefits – the rates and types will vary based on the employee’s location.
All clear? Now, let’s see how you do the math.
How to calculate fringe benefits – a simple formula
Fringe benefit rate is the proportion of benefits to your employee’s wages. You calculate it by taking the annual benefits’ costs and the related payroll taxes and dividing them by the annual wages paid. Remember to check with the local tax authority website which of your benefits are taxable and at which rate.
Fringe benefits rate formula: (Total fringe benefits (including related payroll taxes)/Employee’s annual wage) x 100
For example, if you’ve paid a total of €50,000 in benefits, and €150,000 in the wage, then the fringe benefit rate would be 33.3%.
Why is it important to understand your fringe benefit rates?
Calculating your fringe benefit rate allows you to understand your total labor costs. This, in turn, lets you decide if it would make sense to minimize these expenses by outsourcing work or moving the company office to a more affordable location.
What’s more, when you list all the benefits you offer to staff, you can decide which of them can potentially be put on hold to lower your operational costs during an economic slowdown. Generally speaking, in most markets, the costs will be higher when you collaborate with a worker on an employment contract than if you were to hire independent contractors. So, knowing your current fringe benefit rates will help you weigh your options.
Speaking of employees and contractors, we look at two examples of fringe benefits calculations below. One helps you assess the rate for someone on your employee payroll and workers who are paid by the hour.
Note: as these are simulations only, the benefits listed out can’t serve as a one-size-fits-all template. Remember to list out all the applicable expenses unique to your business, before you start your calculations.
Example: Salary-Based Worked
Let’s assume that an employee makes €70,000 per year. Their total annual fringe benefits are €5,400. These can be broken down into:
Health plan – €3,200
Childcare benefits – €1,000
Life insurance – €480
Commuter stipend – €120
Disability insurance – €600
You divide the employee’s annual fringe benefits of €5,400 by their annual salary of €70,000.
€5,400 / €70,000 = 7.7%
Your fringe benefit rate for this employee is 7.7%. So, you pay an extra 7.7% on top of the employee’s pure monthly salary.
Now, how would this compare to working with an hourly worker?
Example: Hourly Worker
In this scenario, we’re looking at a Germany-based Product Manager who is a self-employed contractor or works with you through a company like Match. Here, the situation is much more advantageous for you from a financial perspective – you don’t cover any statutory benefits for your freelancers or contractors. How come?
While working with a contractor, you’re not in an employer-employee relationship; you’re in a B2B cooperation. This means that the worker pays their own statutory benefits, including public healthcare, pension, and disability insurance. They issue an invoice for the hours they’ve worked, according to the rate you’ve agreed on.
What if you want to offer your contractor additional benefits like private healthcare, as you don’t want them to feel like second-class team members? It’s definitely possible (just make sure you know how to account for and write them off as company expenses). Let’s see what your costs would be.
The Product Manager’s hourly rate is €50. You only need them to work 60 hours a month to get the project done, which puts their invoice total amount at €3,000. For comparative purposes, let’s say they work with you for a full year with an average of 60 hours per month. This puts their total annual invoices at €36,000.
Let’s assume you want to offer the worker a healthcare plan which costs you €100 a month. The total fringe benefit costs for your contractor are €1,200.
€1,200 / €36,000 = 3% fringe benefit rate
As you can see, you can significantly lower your payroll costs by working with freelancers!
How MVP Match Can Help
As you’ve seen in this piece, your fringe benefits rate for employees will depend on two main factors:
where the employee is based and what statutory benefits they must receive
how rich you want your additional perks package to be
One thing’s for certain – the best way to keep fringe benefits low and work with the world’s top talent is to cooperate with freelance or self-employed talent. Here’s where Match steps in. Not only will we help you find the perfect candidates for the roles you need to fill. We’ll also handle all the paperwork for you. This means that you won’t need to draw up a contract and cover benefits for your new worker. Reach out and let’s see how we can support you in your upcoming hiring!