When discussing labour costs, an important division must be made. Personnel costs are the sum of all wages paid to employees, company benefits paid to them, and taxes paid by the employer. But to understand how much an employee costs, some additional aspects must be taken into account. Personnel cost can be divided into two main categories which are direct labour cost (production) and indirect labour cost (non-production related). Direct costs include the salaries of the employees while indirect personnel costs cover all the elements not related to production but necessary to carry out the activities of the personnel.

The cost of an employee is composed of several elements: first of all, the salary. When looking at the cost of an employee as a whole, it is most likely that the basic salary constitutes the largest percentage of the total cost that a company incurs.

In Italy, the sum of all gross wages received by an employee is called Retribuzione Annua Lorda (RAL for short).

The RAL may be the most relevant part of personnel costs, but it is by no means the only one.

In fact, only the employee’s insurance and social security contributions paid by the employee are included in the RAL, while there is an additional part to be paid by the company.

The insurance and social security contributions to be paid by the employer are essentially: INPS contributions, which enable the employee to obtain a pension and INAIL contributions, relating to the insurance of employees against illness and accidents at work.

The total amount of social security and pension contributions payable by the employer ranges between 30 and 35%, and varies according to the employee’s gross annual salary and other elements such as:

Type of company and size; Sector and Qualification of the employee (responsibility, and risk)

Finally, the cost most forgotten by the ‘foreign’ employers is the severance pay, more commonly known by the terms ‘TFR‘ or ‘severance pay’. It represents a sum of money that an employee is entitled to when employment is terminated (whether by dismissal, resignation or retirement).

It is compensation that is deferred with respect to the termination of employment and is determined in annual instalments.

To calculate the amount of TFR to be set aside each year, in order to pay it to the employee at the end of the employment relationship, a very simple calculation is required. It is enough, in fact, to take the gross annual salary and divide it by 13.5.

To summarise, consider that labour costs in Italy range between 40% and 45% of salary; 30% -35% of the cost is borne by the employer and 10% by the employee. In addition, the employer has to pay the TFR, which amounts to approximately an additional monthly salary per year.

This system is profoundly different from the German system, for example, where the labour cost is about 40% of the salary, is borne equally by the employer and the employee, and no severance pay is due.

When hiring employees in Italy, our suggestion is therefore always to consult an experienced consultant to assess these aspects together.