The hands-on aspects of creating a product or providing a service. It is also known as direct labor.
What Is Touch Labor?
Touch labor refers to the hands-on aspects of production or the technical aspects of an organization's tasks or services. You can directly trace touch labor costs to a product. It is usually at the operational level and can be considered the costs of workers who touch a company's product. Most people will more commonly call touch labor "direct labor."
Touch labor involves the hours of work actually used in the production of a product. Companies will often list touch labor under their manufacturing costs. Generally, a company will classify touch labor employees as non-exempt from federal and state labor laws, including qualifying for overtime pay.
Touch labor also refers to workers directly involved in providing a service if the company is service-based. Service-based organizations include restaurants, airlines, banks, movie theatres, and retail stores.
Examples Of Touch Labor
A company will consider any employee who creates a product to be part of touch labor. Examples include assembly-line workers, employees operating machinery, and delivery truck drivers. Any employee dealing with packing, stamping, and product quality control is also an example of touch labor. Products a company is manufacturing can range from technology items, art materials, food products to home supplies.
In a restaurant that is a service setting, employees working in the kitchen preparing the food and servers servicing customers are considered touch labor. In a retail store, the sales clerks and cashiers who engage with customers would be touch laborers. For airlines, touch labor includes the air hostess providing food and beverages during the flight as well as the baggage workers ensuring your bags are on the planes.
Online businesses or software companies will also have touch labor. Any employee with direct contact in creating a product or service, including freelancers or contractors, is considered touch labor. For example, if a company provides informational articles on their website, the writer or graphic designer creating the posts' content is a touch laborer. Similarly, a software engineer that works on creating software a company sells to their clients is also considered a touch labor employee.
History Of Touch Labor
Touch labor came about as an accounting term to identify the different types of costs that a company accrues. Jerome Lee (J.Lee) Nicholson lived from 1863 to 1924 and was known as the pioneer in cost accounting. In the United States, he is even called the "father of cost accounting."
In 1909, Nicholson published a handbook for manufacturers titled "Nicholson in Factory Organization and Costs." In the book, Nicholson coined the concept of the three principles that comprise cost in manufacturing enterprises. The principles are material, labor, and indirect expense. Direct labor is listed and explained in the book under the labor principle section.
In 1920, Nicholson also contributed towards establishing the National Association of Cost Accountants (NACA). Today the NACA is a professional organization for accountants known as the Institute of Management Accountants.
Touch Labor vs. Indirect Labor
While touch labor is hands-on and directly related to creating a product or providing a service, indirect labor is any other labor type outside this. A company will list indirect labor under non-manufacturing costs. Examples of non-manufacturing costs include marketing or administrative costs.
Indirect labor is crucial but not directly involved with making a product or providing a service. Indirect labor is considered part of overhead costs. Overhead costs are the costs of running a business outside the costs of making a product or offering a service. The company will consider salaries, taxes, and benefits for employees in the labor costs.
Examples of indirect labor costs are salaries for janitors, maintenance, security guards, and certain supervisors or administrative employees. Employees that are part of marketing a product, such as a social media manager, are also considered indirect labor.
Touch Labor vs. Knowledge Worker
Sometimes touch labor is associated with manual labor only and is thus seen as different from a knowledge worker. However, a knowledge worker can be considered touch labor if they work directly on creating the product. For example, a programmer will provide direct labor hours with the lines of code they write to create a program.
A knowledge worker is trained to handle intellectual tasks or work requiring specific knowledge and skills. The work they provide is often associated with problem-solving. Additional examples of knowledge workers include architects, engineers, pharmacists, physicians, scientists, accountants, lawyers, academics, and designers.
In the examples listed above, not all are considered touch labor. For instance, an accountant is an indirect laborer and deals with the administrative side of a business rather than directly with the product or service provided to clients.