The total costs incurred by an employer in the employment of the labour factor, made up of: direct pay, i.e. the wage or salary which is paid regularly for normal working hours plus overtime and performance-related premiums and allowances; pay for time when no work is done, such as annual holidays, public holidays, illness, visits to the doctor, time off to nurse sick relatives and children, etc.; special payments (Sonderzahlungen), particularly “thirteenth” and “fourteenth” month's pay (holiday bonus and Christmas bonus respectively), profitability bonuses (Bilanzgelder), severance pay and shares of profits; payments in kind, such as company housing or a company car; social expenditure, such as the employer's share of social insurance contributions, expenditure on Sozialleistungen, i.e. collectively or individually agreed or discretionary benefits such as insurance schemes, etc., general company welfare facilities (Sozialeinrichtungen) such as a canteen, and training; and payroll taxes such as local authority taxes and compulsory contributions to the Family Allowances Fund from which child benefit is paid (see social security).

Labour costs

Direct pay (performance- related or time-based)

Non-pay costs

Direct labour costs

Indirect labour costs

- Basic pay

Pay for time when no work is done

Special payments to employees

Labour costs which do not benefit the employee directly

- Annual holidays

- Holiday bonus and Christmas

- Employer expenditure on social security

- Supplements and allowances

- Public holidays

bonus (13th and 14th month's pay)

- Contributions to insurance schemes of all kinds (compulsory state scheme, collectively or individually agreed, discretionary)

- Illness

- Visits to the doctor

- Public authority visits

- Severance pay

- Time off to nurse sick children, etc.

- Other special payments

- Payments in kind, etc.

- General company welfare facilities

- Training

- Payroll taxes

The way in which these cost elements are seen in relation to each other varies in economic policy discussion and economic analysis. In Austrian economic policy, the distinction made is almost exclusively a differentiation between direct pay as a strict return for the performance of work (whether in the form of performance-related or time-based pay), paid regularly to the employee at weekly or monthly intervals, and non-pay labour costs (Lohnnebenkosten, called Personalzusatzkosten in Germany), which include all other cost components which are paid only occasionally or only indirectly benefit the employee. On the other hand, in the publications of the Statistical Office of the European Communities (EUROSTAT) the distinction made is a differentiation between direct labour costs which benefit the employee directly and indirect labour costs which benefit the employee only indirectly via security benefits and do not constitute income.

The structure of a given country's labour costs is determined mainly by the way in which the social security is financed. In countries like Austria, where the welfare state is organized predominantly through a compulsory social insurance system financed from employer and employee contributions, non-pay or indirect labour costs form a relatively high proportion. In the mid-1990s, although on an international scale of labour costs Austria ranked sixth (behind Germany, Switzerland, Belgium, Denmark and Sweden), only Germany and Switzerland had significantly higher costs (+ 23% and + 14%). In the EU (average), the USA and Italy and France labour costs were respectively 16%, 30% and 25% lower than in Austrian industry. In the UK and Spain they were approximately 40% lower.

Direct pay and non-pay costs form almost equal proportions of the cost of the labour factor in Austria. This means that whereas direct pay is relatively low, non-pay costs, at almost equal, are higher than in any other country with the sole exception of Italy. They are due firstly to relatively high employers' social insurance contributions and secondly to high special payments (holiday bonus and Christmas bonus, respectively constituting a thirteenth and fourteenth month's pay, and severance pay) which are taxed at a flat rate of only 6%. Such preferential treatment of special payments has encouraged the growth of these components of non-pay costs; if the thirteenth and fourteenth months' payments were reclassified as direct pay, non-pay labour costs would amount to just under 70% of direct pay.

Please note: the European industrial relations glossaries were compiled between 1991 and 2003 and are not updated. For current material see the European industrial relations dictionary.