Hiring your first employee is the first step of any growth to an organization…A frequent visitor to our Blog, Joe Thomas of the UK, recently sent in this wonderful perspective of the real costs associated with hiring your first employee, and we felt we should share this with you. Although it is written with UK laws in mind the general premise of many of his points in this article will hold true for the US as well so be sure that you research thoroughly the laws and obligations that you may have in your locations, and be prepared for significant changes you may need to make once you hire that very first staff member for your organization. Thanks Joe for sending this in.
Expanding your Business: The real cost of taking on your first employee
The following article reflects the UK law where regulations in the US may differ slightly. Key points however will be relatively the same.
by: Joe Thomas, Kemp House, 152 City Road London, EC1V 2NX
There comes a time in the growth cycle of any start-up when it becomes more pressing to move on from handling every aspect of the business yourself. At this point you probably look to hire your first member of staff. Maybe prior to that you utilised the services of freelancers, and while that had its benefits, it meant there was no-one you could fully trust to take over the reins when you needed to be away for business or pleasure.
Employing your first member of staff has many advantages, but it also comes with additional expenses, regulatory responsibilities and a call on your time for induction and further training. Weigh these all up carefully before you move ahead as it is not a decision to be taken lightly.
If you have limited experience of hiring staff there is a great deal of employment law relating to hiring, creating contracts and regulations you need to abide by once the person is in your employment. It can therefore save you considerable time, money and stress to take advice on this before you start the process. That said let’s look at the key areas of cost you will incur when you take the decision to hire your first member of staff:
Recruitment Costs
There are numerous ways to find staff and each comes with its pros and cons. A recruitment agency will take much of the strain out of the process for you but you will usually pay a fee equivalent to around 20 to 25% of your hire’s annual salary. This is a substantial amount and therefore you might be better off opting for a cheaper option such as advertising online or even using a social media site like LinkedIn to research potential candidates.
The Employee’s Salary
Naturally the new employee’s salary will be a considerable expense and even if you are only paying minimum wage this will soon mount up. You also need to be aware that an employee’s salary will be a priority for your business as staff members expect to be paid on a fixed date every month and there is no way to move this. Therefore, if you cannot accurately predict your cash flow for the year ahead, you may not be ready for a new hire.
As well as the basic salary you will also be responsible for contributing to your employee’s pension, calculating and paying tax and National Insurance and usually providing your employee with a range of other employee benefits, such as bonus schemes, life assurance and even private medical insurance. These are not all statutory requirements but as your business grows, they will make you a more attractive employer.
Payroll Costs
If you don’t want to calculate all these details yourself, you can outsource the management of your payroll. This too will incur an expense however it may well be worth it to ensure you are abiding by the law and in the process it will take a great deal of stress off your plate.
Insurance
Once you employ even one member of staff you are required by law to get employer’s liability insurance. This protects you against claims should your staff be injured or fall ill as a result of working for you, and there are steep fines should you not purchase this. You can also get additional insurance to protect against legal claims from your staff, for example for discrimination or unfair dismissal.
Employment Rights
You also need to take into account the rights your member of staff will have for holiday pay, sickness pay, maternity leave and pay and the right to request flexible working. All these will incur extra costs and could leave you with gaps you will need to fill whilst your staff member is absent. If you fill these gaps with temporary staff or freelancers then further costs still will be incurred.
Premises
As a sole trader you may have been used to working from home but this becomes much more difficult once you have an employee. You will probably need to either use a serviced office for you both to work from or lease an office directly. Both of these can prove expensive so it’s worth doing your research on local costs before making the decision to hire.
Your Time
When you hire your first member of staff you need to put employee policies in place and spend time training the staff member; carrying out appraisals with them; monitoring what they are doing; and ensuring their performance is at the level you expect it to be. As someone who has taken responsibility for every aspect of your business up until this point, it can sometimes also be difficult to delegate. Therefore, ensure you have clear parameters for the work your new hire is going to undertake.
An employee also has a very different mindset to someone who owns a business and therefore you may need to deal with performance or disciplinary issues if you don’t hire wisely. You will also be the only two people in the business initially, so you need to ensure you have a good working relationship for things to run smoothly.
Risk of the Unknown
A big risk when you are making your first hire is that you know next to nothing about the person you are taking on. You may not be hugely experienced at recruiting and you are going to need to trust very much to what the person’s CV says and what they communicate to you during the interview.
Because of this element of risk it is always important to stick to the rulebook. Make sure you implement robust HR policies and procedures, always take up references, and monitor the person very carefully, particularly during their probationary period. Do not be afraid to make a decision, however difficult, to bring the employment to an end at this stage if things aren’t working out. It’s also vital to put a business disaster recovery plan in place. This will help you to ensure you are not leaving yourself open to major problems and it means you have a clear plan to follow should the worst happen. The more you can minimise risk the better.
The Costs of Not Hiring
We have outlined all the costs involved in making your first hire, and they are substantial. However, if your business is growing at a fast pace and you are struggling to keep up with demand, it might be just as costly not to hire. Any business which wants to grow over the long term will need to hire at some stage and it can be just as detrimental to leave this too late as it can be to hire too early.
The important factor is to weigh up all the pros and cons, look at your profit-and-loss forecasts for the year ahead, and then decide whether now is the right time to welcome a new employee into your business. Only you can make that decision but if you do it with full awareness of what you are taking on, it’s much easier to make the right choice.
TPG Social Media