Labour cost per hour is what a role costs you over a year divided by the hours of actual work, which makes it higher than the pay rate on the contract. This guide is about Victoria, because the payroll tax and WorkCover lines follow Victorian rules. It is written for operations, site and finance managers who budget labour for manufacturing and warehouse crews.
Why the pay rate is not the cost of an hour
The true cost of an employee in Australia is higher than the pay rate, because every paid hour carries on-costs and only some paid hours produce work. Add the on-costs, take the hours with no output out of the paid hours, and you have the number for every roster, quote and budget line. In the example below, a $30.00 pay rate becomes $41.27 for each productive hour.
Add the on-costs you can verify
Employee on-costs in Victoria change, so open each official page when you build and review the budget.
Superannuation
The super guarantee rate is 12 per cent of an employee's qualifying earnings, according to business.gov.au's superannuation guide. It is paid in addition to wages, and an award or enterprise agreement can set a higher rate. Under Payday Super, which started on 1 July 2026, employers pay super when they pay wages instead of every quarter. The Australian Taxation Office sets which payments count as qualifying earnings and the deadlines, so confirm both there.
WorkCover and payroll tax
WorkSafe Victoria works out your WorkCover insurance cost from your rateable remuneration and the standard rate for your industry. Rateable remuneration includes wages, salaries, superannuation and other benefits paid before tax. Once it is over $200,000 a year, the number of WorkCover claims lodged against your business also counts. WorkSafe Victoria's page on how it counts remuneration lists what is included.
Victorian payroll tax is 4.85 per cent, or 1.2125 per cent for regional Victorian employers, according to the State Revenue Office's current payroll tax rates. A deduction of up to $1,000,000 a year reduces the wages that are taxed. That figure is a maximum: it phases out for employers with total annual taxable Australian wages between $3,000,000 and $5,000,000, and above $5,000,000 there is no deduction.
How much of the deduction you get depends on your total wages, so confirm your own position, and which payments count as taxable wages, with the State Revenue Office before you put a payroll tax figure in the budget.
According to the State Revenue Office's agency guidance, under an employment agency contract the agency is deemed to be the employer and pays payroll tax on the wages it pays the worker. Under a placement arrangement, the client is deemed to be the employer.
Paid leave and training time
Full-time and part-time employees get 4 weeks of annual leave for every 12 months worked, and full-time employees get 10 days a year of paid sick or carer's leave, according to the business.gov.au pay and leave guide. Part-time sick and carer's leave depends on ordinary hours, and casuals get neither annual leave nor paid sick or carer's leave. Your award or agreement may add to these, so take the hours from your own pay data.
Paid leave is not an extra cost in addition to the wage. It is paid time with nobody at the machine, so it comes out of the hours in the next section. Training time works the same way: induction, safety briefings and licence refreshers are paid hours with no output. Count each hour once. Course fees and tickets are cash costs, added as an annual line.
Divide by productive hours, not paid hours
Cost per productive hour is the annual role cost divided by productive hours, which are paid hours less leave, training and any other paid time with no output.
A worked example with illustrative numbers
Every figure below is made up to show the method. None is an award rate, and your own pay data replaces each one. A full-time warehouse operator is paid $30.00 an hour for 40 hours a week over 52 weeks, which is 2,080 paid hours and $62,400 in base pay.
- Super at 12 per cent. $62,400 x 12% = $7,488.
- Payroll tax at 4.85 per cent. Shown here on pay plus super ($69,888), about $3,390; the State Revenue Office confirms which payments count as wages. This line is zero if your deduction covers your wages.
- WorkCover. A stand-in cost of $1,000 for this role. Replace it with your own WorkCover cost for this role.
- Annual role cost. $62,400 + $7,488 + $3,390 + $1,000 = $74,278.
Now take the hours with no output out of the 2,080 paid hours:
- Annual leave. 4 weeks x 40 hours = 160 hours.
- Personal leave. 10 days x 8 hours = 80 hours.
- Training, induction and safety briefings. 40 hours, counted here and nowhere else.
- Productive hours. 2,080 - 160 - 80 - 40 = 1,800.
Your award or agreement may add more paid time with no output; take that out of the paid hours too.
The cost per paid hour is $74,278 / 2,080 = $35.71. The labour cost per productive hour is $74,278 / 1,800 = $41.27, which is $11.27 above the $30.00 pay rate.
Compare like with like
A permanent employee, a casual and a labour hire worker can sit on one hourly basis by running the same sum: what the role costs over the year, divided by the hours that produce work. For a casual, start from the rate in the applicable award or agreement and add the same super, payroll tax and WorkCover lines. For labour hire, including labour hire in Melbourne, take the hourly charge on the invoice, ask what it covers, and divide by the hours the worker produced.
For full comparisons, one post sets the cost of permanent versus labour hire trades side by side, another looks at electrical labour hire versus permanent hire, and a third is about comparing hire and overtime costs at peak. On the supplier side, there is a post on buying labour hire through a tender and a Queensland guide to choosing a casual agency that covers how clear its rate card is. The right mix of the three is in the article on a flexible workforce model.
Build the annual labour budget by role and check it monthly
A labour budget for a manufacturing or warehouse site is built role by role, in two steps:
- Start from heads. Decide how many people each role needs. If you first need to work out headcount from volume, that post sets out the method.
- Multiply. Heads times the annual role cost. Three operators at $74,278 each is $222,834 for the year, and 5,400 productive hours. That total includes $3,390 a head of payroll tax, which is zero if your deduction covers your wages.
Split each month's gap between budget and actual into two parts:
- Hours variance. Actual productive hours less budgeted productive hours, times the budgeted cost per productive hour.
- Rate variance. Actual cost per productive hour less the budgeted figure, times actual productive hours.
Paying for hours that produce no work shows up as a higher cost per productive hour. If you would rather not run payroll in house, Chandler Personnel offers payroll outsourcing.
Related Resources
- Victorian payroll tax current rates
- How WorkSafe Victoria counts remuneration
- Labour hire in Melbourne
- Permanent recruitment
- Buying labour hire through a tender
- Electrical labour hire versus permanent hire
- Comparing hire and overtime costs at peak
Frequently Asked Questions
How do I calculate the true cost of an employee per hour?
Add base pay, super, payroll tax, WorkCover cost and any course fees to get the annual role cost. Then divide by productive hours: paid hours less annual leave, personal leave, training and other paid time with no output.
What on-costs do I need to add to a wage in Victoria?
Add super at 12 per cent of qualifying earnings, or the higher rate in your award or agreement. Add Victorian payroll tax at 4.85 per cent (1.2125 per cent for regional employers) after any deduction you qualify for, and your WorkCover insurance cost.
Who pays payroll tax on labour hire workers?
It depends on the arrangement. Under an employment agency contract, the agency is deemed to be the employer and pays payroll tax on the wages it pays the worker. Under a placement arrangement, the client is deemed to be the employer.
Why use productive hours instead of paid hours?
Paid hours include leave and training that you pay for but that produce no work, so dividing by them understates what an hour of work costs. In the example above, the cost is $35.71 per paid hour but $41.27 per productive hour.
How often should I update my labour budget?
Compare actual with budget every month. Rebuild each role's cost per productive hour at the start of the financial year and whenever super, payroll tax, WorkCover or your pay rates change.
Budget the productive hour, not the pay rate
Labour cost per hour is the annual cost of a role divided by the hours it is productive. Build it from verified on-costs, take leave and training out of the paid hours, and budget each role on the result. Start with one role: price its productive hour this week, then check it against next month's actuals.
