Here you are, getting ready to hire a new employee, or possibly your first employee. You are so excited! You think through how much you can afford to pay them per hour or per year. You’ve researched the minimum wage laws and know what the minimum is you have to pay. You hire them and agree to an hourly rate of $10/hour. The days, weeks and months roll by. You start to see that your profit margins aren’t as good as you thought they’d be. You research the issue and find that you have more money going out because of that employee than you realized. They are still only making the $10/hour you promised. You’ve just ran into the brick wall called the hidden costs of a new hire.
While you might think you are hiring a new employee for $10/hour, the actuality is that employee is going to cost you at least 20-25% more than the rate you are paying them. Shocking, I know, but it’s true. There are a lot of known costs but also hidden costs associated with a new-hire that you might not think of. Even though they are making $50k a year, they are costing you closer to $65k a year with the extra costs. What are some of those costs? Let’s take a look.
Known Costs of a New Hire:
Social Security and Medicare Tax
Businesses have to pay 6.2% of what they pay their employees to the federal government. The Medicare Tax is 1.45% of the employees pay.
Workers’ Compensation Insurance
Each person on your payroll must be accounted for on your workers’ compensation insurance. This is an additional percentage of your gross payroll and the percentage/rate will vary based on your industry and safety record.
Unemployment insurance is paid on both a state and federal level. This fee is different by every state. California’s state unemployment insurance rate varies based on your business’ score for unemployment.
This is an optional benefit unless you are considered an Applicable Large Employer but if you chose to offer it, it must be offered to all qualified employees.
This is not required but definitely a great benefit if you want to attract high-level employees. It is, however, another additional cost.
Hidden Costs of a New Hire
Turnover happens. Sometimes you lose a bad employee and sometimes you lose your superstar. “The Saratoga Institute says that losing a single employee can cost you 50% of his or her annual compensation. The numbers are even higher when you get into the executive ranks.“ (Joel A. Garfinkle) From recruiting to interviewing the hiring and on boarding, that is a lot of time you can’t get back when the employee decides to leave or you fire them. The highest turnover rates are in the first 90 days with the 60-90 day mark being the highest rate of turnover.
Liability of Termination
Whenever you terminate an employee’s work agreement, you could face lawsuits. If you haven’t properly documented performance reviews, warnings and attempts to help correct the negative behavior, the employee may have grounds to file a complaint. Make sure all your ducks are in a row and you are up-to-date on your current employment laws. Surprisingly, the former employee wins 50 – 70% of wrongful termination lawsuits.
When unemployment claims are filed, your unemployment insurance helps pay the claim. However, the more claims you have, the worse your unemployment score gets. The worse the score, the higher the rates. Using a staffing agency for your employee’s introductory period can help you keep these costs down.
Hiring is expensive no matter how you look at it but you can save yourself time and money if you do it right. Using a staffing agency, even if you do the recruiting yourself, can help you make sure the employee is a good fit for your company before you take on the extra liability.