The real cost of hiring your first employee

Taking on your first employee should be an exciting time. It means your business idea is working and you need help to expand. But while employees will help your business grow, they will also bring new stresses you may not have encountered before.

There are all sorts of costs that you must take into account. Plus the way your business runs with just you and any business partner, may not continue to be appropriate when employees are on board.

This guide will help you identify the true cost of an employee, and build a plan to manage the impact on your business.

Recruitment

Advertising for staff is incredibly expensive. Local papers charge more for recruitment adverts than any other advertising. And a recruitment agency could ask for up to 20% of your employee’s first year salary to find the right person for you. If you employ specialised staff, work out what publications or websites they read – specialised recruitment advertising is equally expensive, but should be more effective.

If you operate in an industry with competition for staff, consider advertising your vacancy on local radio. That way you will reach other business’s staff that aren’t actively looking for a new job, but may fancy a change.

There are many laws covering recruitment, especially focusing on equal opportunities. For more information read our guides to the basics of taking on employees and recruiting and interviewing.

Salary

The biggest cost of an employee. To minimise the financial impact, many businesses start with part-time help, or employ someone on a fixed term contract. That’s fine, although it can sometimes be harder to find the right person who’s willing to work part-time. And as your business gets bigger, you might not be able to extend your employee’s hours, meaning you are forced to recruit someone else.

Remember that your employee will expect their salary in full, on a fixed date each month. You won’t be able reduce how much you give them if it’s been a quiet month. It’s worth looking back at your cash flow over the last year and trying to predict your workload for the next 12 months. It’s you that will take a financial hit if the work drops off, not your employee.

National insurance and income tax

As the employer, you are responsible for complying with a number of laws and ensuring income tax and National Insurance is paid – or you could face penalties.

Each month it’s your job to calculate and pay the correct PAYE income tax deductions. You also have to deduct some National Insurance from your employee, and pay some extra contributions yourself. There’s also a stack of paperwork to be filled out. Business Link have some useful advice on the subject here.

Many accountants and bookkeepers offer a payroll service, where they will sort all of the paperwork and keep you legal. Unless you have an in-house resource, this is generally a worthwhile investment.

Insurance

It’s compulsory to get employer’s liability insurance, which protects your staff if they are injured or fall ill as a result of their work. Your insurance must be at least £5 million; most insurers offer a basic £10 million cover. The fines for not having the insurance are staggering – they can be up to £2,500 a day. Business Link has a definition of an employee and other advice here.

It’s possible to get insurance to cover your business in the event of any legal claims by your employee, for example if they are alleging unfair dismissal.

While you are sorting that insurance out, it would be worth ensuring your business is protected with public liability insurance, and other insurance related to what you do – either product indemnity, pollution risk insurance, or professional indemnity.

Sickness and maternity

Your employee will have rights – lots of them. You will be paying them at least the National Minimum Wage, money if they are off sick, when they have holidays and if they have a baby. All of this needs to be considered in advance – if your workload has increased, how will you cope? Could your business afford to pay for temps to cover? It’s worth you setting out a simple clear sickness policy from day one, so both you and your employee know where you stand.

Premises

If you currently operate your business from home, you may need to take on premises when you get an employee. Apart from the fact you might not want people working out of your spare bedroom, and it makes proper holidays difficult, you may struggle to get some necessary insurances on a domestic property. To keep costs under control, consider renting a small office in a serviced building, where your bills will be predictable.

Management time

The biggest hidden cost in taking on an employee is how much of your time they will take up. Apart from the initial training, paperwork and clarifying your business’s policies, they will need time each week keeping them on track and managing them effectively. If you skimp here, it will come back to bite you further down the line.

It’s worth thinking this through when planning how much work your business will be able to take on with an employee. Also remember that no employee will be as dedicated or hard working as you – they don’t have as much to gain or lose from the business succeeding or failing.

Pensions & employee benefits

Small employers are not obliged to set up a pension scheme, but as you grow you might have to provide access to a third party pension scheme and pay contributions towards it. As you take on more employees, you will need to start looking at other benefits, such as bonus schemes, company cars, and maybe even perks like private health insurance.

Your employees will be taxed on many of these benefits, so discuss them with your team first. These will all help to increase the loyalty of your employees to your business – but will also hit your cash flow.

Remember to get professional advice from a qualified person before taking any action. Don’t rely purely on information contained in this article.