The True Cost Of Hiring An Employee? Much More Than Their Salary

Working out the true cost of hiring an employee in your business has, historically, been difficult to calculate.

A salary is easy, of course, but it is all the non-wage costs which are often elusive. Can you estimate how much tax will the employee cost you? What about the cost of sickness? Legal fees? Red tape?

A new report, published by the Centre for Economics and Business Research (CEBR) and the UK’s Federation of Small Business, has attempted to tackle the issue.

The actual amount an employee costs is interesting in itself. But even more interesting is the economies of scale that apply to employment: the first employee is the most expensive, and it gets cheaper and cheaper the more you hire.

The contrast between hiring just the one employee and hiring when you’re a larger company is striking.

On average, the index calculates, a business with one employee and one owner faces an average employment cost of £35,500 ($56,770) per worker. For a typical business in the 20-49 employee range, though, the cost is of £25,100 ($40,165) per worker. The difference between the two is close to a third less.

British pound (Credit: tnimalan)

In the case of a company's first-hire, around 20 per cent of the total employment costs goes to national insurance contributions (the UK equivalent to Social Security) and income tax. On top of that, the cost of the entrepreneur’s time in carrying out admin is estimated to be 2.3 per cent of total costs, paid out of his own salary. The smaller the firm, the higher the share of non-wage costs relative to total employment costs.

But for the 20+ size business, a greater proportion of total employment costs is devoted towards the employees’ wages instead of the overheads. Companies get, in other words, more efficient with size.

The knock-on economic effect

The typical small business will pay an employee around £21,800, based on typical wage rates for a professional or skilled worker. Layered on top of this is national insurance contributions (estimated to be £13,900), plus other non-wage costs, such as the cost of payroll, pension contributions, sickness absences, legal fees… the index’s list of variables is pretty long.

It is these extra costs that the authors of the report want the government to address, for this would stimulate business growth and the wider economy.

“Ensuring that regulatory requirements and employment-related statutory obligations do not become more onerous – or perhaps even reducing the burden of those requirements – could lend a significant boost to the UK’s small businesses, supporting employment, competitiveness and UK plc’s ability to deliver sustained economic growth,” says the report.

The research is pretty clear: the smaller the business, the higher the opportunity cost for an employer to comply with all of the regulations and administrative burdens.

The key takeaway of the research is that while small businesses’ labour costs are, primarily, affected by wages, there are a whole host of legislative and regulatory requirements that add to the bill. And these can be changed by government to encourage or discourage bosses from hiring.

“Our research follows a significant rise of self-employment in an increasingly entrepreneurial Britain,” says Charles Davis, a director at CEBR.

“One of the key findings here is that hiring one’s first employee costs a lot more than just paying their wages. This raises the question: could the government do more to make it easier for the plethora of one-man bands and micro-businesses to take on more employees?”

The government can make things easier and, crucially, cheaper for smaller businesses – but can it afford to do so? Or do employers just need to bite the bullet until they can scale?

I am a business journalist living in London, UK. I write about entrepreneurship and small business, looking at topics ranging from finance to family businesses, US expat...