Hiring your first employee marks a significant milestone. It’s usually a sign that your business is ‘on the rise’ — opening up the possibility of expansion, delivering a better service to customers, and freeing up some of your own time to focus on wider business goals. Your new employee should prove to be an asset, adding value to your business. But with this comes certain responsibilities and a regular financial commitment. So, we’re asking, how much does hiring someone cost?
In terms of cash, there’s more to employing someone than simply issuing a pay cheque each month. Other costs to factor in include National Insurance, holiday pay, employers’ liability insurance, and the expenses involved in equipping and making room for the new starter. Calculating these costs enables you to go into the recruitment process with eyes wide open, giving you a true reflection of your likely outlay and stopping you from running into cash flow problems later on.
Finding the right person
The average cost of recruiting a new member of staff is calculated at around £5,000. The bulk of this comprises of a combination of agency fees, vacancy advertisement, and time spent on sifting through applications and interviewing applicants.
Recruitment agencies source and then present you with a hand-picked selection of candidates, potentially saving you a lot of time and effort. The downside is the fee for using an agency — typically equivalent to around 15% of the new starter’s proposed salary. However, if you’re looking for a new employee with very niche, hard-to-find skills, an agency might be the way forward; just to save you on some legwork. If you want to keep recruitment costs down, however, advertising the job on your own website and spreading the word via Facebook, LinkedIn, and Twitter is a good start.
Other ‘free’ ways of finding new recruits include Jobcentre Plus, enabling you to advertise with the Government’s Universal Jobmatch. Your nearest universities and further education colleges will also have services in place for matching recent graduates with employers.
Equipping a new employee
Before you take someone on, you should calculate how much it will cost to give them everything they need to do their job. If those costs are going to be substantial (an extra van or set of machinery, for instance), leasing rather than buying might be a way forward — at least in the short term. This way, you can test whether boosting manpower has had the desired effect, without taking a gamble on a huge initial outlay on equipment.
For business software, check the cost of switching from single-user to multi-user licences. Where relevant, factor in the cost of a new set of personal protective equipment and clothing for your new starter. As well as the initial spend, ongoing costs such as extra supplies, stationery, fuel, and servicing of any extra equipment should also be costed.
Preparing and maintaining your workplace
Consider the cost of any required workplace changes to accommodate new people. In short, can your workplace cope with someone else present? There is a legal space requirement of 11m³ for persons who habitually occupy one workroom, which means if two people are going to share an office, it needs to be a space with a volume of at least 22m³.
Your employee needs to be able to work in reasonable comfort, which may require investing in improvements to your heating and ventilation system. Normally, the workroom temperature should be at least 16°C and any additional heating costs will need to be taken into account — especially if the new starter is going to be in his/her own room.
Take time for induction and training
Research suggests that it can take up to 28 weeks for a new starter to reach full productivity. When estimating how much revenue the new starter is going to generate, allow for a reasonable ‘bedding-in’ period. Depending on your business, a reasonable estimate of how productive a new starter is going to be might start at 0% for the first couple of weeks, gradually scaling up to 100% productivity by six months.
Allocate a suitable amount of time for a proper induction, showing the new starter the ropes. Training your new employee may mean temporarily taking time out from generating revenue. Take account of this by perhaps rearranging your own work schedule.
The payment of salary is likely to be your biggest regular financial commitment when taking on a new employee. When setting pay, you need to take into account cash flow. This is what your business can afford to pay each month, as well as the going market rate, and your legal obligations.
If you’re creating an entry-level post, the effects of scheduled changes to the national minimum wage may need to be costed. April 2016 sees the introduction of the national living wage of £7.20 an hour for workers aged 25 and older (for workers aged 21-24, the current national minimum wage of £6.70 will still apply). The government has set a target for the national living wage to increase gradually over the next few years. It will reach £9 by 2020. So keep an eye on Budget and Autumn Statement announcements each year. Especially concerning future living wage pay increases, as it will help you plan for this.
Tax and National Insurance
It is your responsibility to deduct Income Tax and employee’s (Class 1) National Insurance from each employee’s pay. With these, you are essentially making those deductions on behalf of your employee — with no additional net cost to you.
However, in your staffing costings, you will need to factor in payment of employer’s (Class 2) contributions. Typically, these amount to payment of an amount equivalent to 13.8% of an employee’s gross earnings. Look at the official National Insurance rates and categories guidelines to help you calculate this.
What is a class of share?
A class of shares is a type of listed company stock that is differentiated by the level of voting rights each shareholder receives. Each class of shares will have their own conditions and rights attached to it. The higher the class, the more voting rights are attached to each share.
Holidays, sick pay, maternity, and parental leave
There are circumstances where you still have an obligation to pay your employee. This is either in part or in full, even when they are not actually at work.
The law entitles almost all employees to 5.6 weeks paid holiday per year. When costing the implications of this, decide whether you are going to need to draft in extra help to cover holidays. Will you need to draft in a temp from an agency? How much will this cost? Make enquiries with local agencies to find out, or consider hiring for work experience.
If an employee becomes unable to work through illness, there may be a requirement for you to pay Statutory Sick Pay (SSP), currently £88.45 a week for up to 28 weeks. You should also be aware of the possibility of your employee becoming entitled to paid maternity or parental leave.
Having thought about the points above, you should have a better picture of the following:
- The steps you will need to take to prepare for taking on board an employee and the likely costs of these preparations
- Your likely financial commitments linked to having an employee on board
- The fact that sometimes you have to pay employees even when they are not working
To find out more about managing cashflow, budgeting, and a range of other issues that affect small businesses, browse our help centre.