What are the Costs of Taking on Employees?

What are the Costs of Taking on Employees?

Nick Robinson

Nick Robinson

Jul 07, 2015 | Business Planning, Payroll

Taking on employees for the first time can be an exciting time for your business, but potentially a financially daunting one. Employing somebody can be an expensive business, and there are a number of costs associated with doing so outside of just paying their salary. It can be difficult to keep track of the different expenses you will face and accurately forecast how much it will cost in total.

The main costs that you will face when taking on an employee are:

Salary

Obviously, you will have to pay your employee a wage of some kind, whether that be hourly or at a fixed yearly rate. This is the one cost above all others that you have almost certainly accounted for, but you should still make sure you consider it properly. Make sure you are offering the “going rate” for an employee at this level in this kind of role, and think carefully about whether the value a new employee will bring to your business will outweigh the cost of paying that employee.

Recruitment Costs

In order to get any applicants for the role, you will need to advertise the vacancy. This is not a cheap process. You could outsource this to a recruitment agency, in which case you could expect to pay up to a fifth of the new employee’s first year salary as a fee. Alternatively you could advertise yourself, which will be cheaper but will take time and effort and still leave you with fees to pay. In local newspapers, job adverts tend to be more expensive to place than any other form of advertising.

Administrative Costs

There will be costs associated with ongoing administration after you have become an employer. You will need to spend time and probably money ensuring that all wage payments are processed properly and on time and that all additional payments such as tax and pension contributions are carried out properly. This will require so much work that processing it all in-house can require taking on another employee, as well as being a complex process with fines for getting it wrong. It may be simpler and more cost-effective to outsource it to a specialist payroll bureau. This is generally fairly low-cost, and will ensure that the whole process is carried out properly without burdening your business.

Employee Rights and Benefits

Your employee may well be eligible for a workplace pension scheme under auto-enrolment, and this will leave you with the cost of employer contributions. On top of this, employee rights such as sick leave, maternity leave and paid holidays will all cost your business money. Furthermore, since June last year all employees have had a right to request flexible working.  You will also have to contribute towards their benefits and rights from the state through employer national insurance contributions. Make sure you consider the cost implications of all these factors – such as the cost of hiring temps during an employee’s paid sick or maternity leave.

Insurance

As an employer, you will be obligated to take out an Employers’ Liability Insurance policy worth at least £5 million (from most insurers, the basic level offered is £10 million). Look into how much this will cost before taking on an employee. Be aware that getting caught without the necessary cover is a definite financial burden for your business, with fines of up to £2,500 daily!

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