The Four Categories of Employee Costs

If your business only hires a new employee once or twice a year, the list of costs associated with hiring, on-boarding, training and retaining good people might seem incidental. However, if you, like one of my clients, who employs hundreds of in-home caregivers, you are in a constant hiring mode. Then all these costly details add up quickly and you will need to have strong processes in place to identify and control them.

1) Hiring costs:

The many expenses associated with a new employee start well before he or she does and should be recorded in a dedicated recruitment expense account rather than into any of several possible miscellaneous expense categories. Hard hiring costs are pretty self-evident but there are also plenty of soft administrative costs mixed into the process that you may want to capture as well. For example, you should assign the percentage of time spent by employees recruiting as hiring costs. You can estimate whole dollar amounts to allocate per hire, but you can’t control what you don’t measure, so capture these costs.

    1. Job specific advertising, on-line, in print or other
    2. Time reviewing and selecting the best resumes and applications
    3. Phone time spent screening those applicants
    4. Interviewing: In groups, first and second level individual interviews and perhaps a final interview by one of your executives.
    5. Aptitude, knowledge & skills testing including time and materials ($150-$500ea)
    6. Drug screening ($15-$25ea)
    7. Background checks ($40 – $70 ea. depending on how many jurisdictions you check)
    8. DMV check is a must for anyone driving on company business.
    9. Professional agency fees (25-30% of first year salary is common)

And these all take place before the new employee is officially hired. Many of these are unavoidable, but being aware of them and minimize them when and where you can is the goal.

2) On-boarding: 

This is the time taken to familiarize the new hire with the company’s physical and cultural layout. Where are the departments and who are the supervisors that they may interact with. Who are their co-workers? Where do they park and when and where do they take breaks and lunch? Also, keep in mind the costs of:

  1. General orientation meetings
  2. W-4 and other HR forms
  3. Employee handbooks
  4. Benefits handbooks
  5. Employee uniforms
  6. Security badges
  7. Parking permits

3) Training Costs:

It takes time and dedication of resources to advance an employee up the ladder from “newbie” ” to fully productive team member. Your goal is to move them quickly from cost center to the tipping point where they are fully productive. In order to accomplish this there are certain essential general and/ or job specific types of training that might be undertaken. Regardless of subject matter or format, there will be real costs associated with training. Examples include:

  1. Safety rules and regulations (Hazmat, etc.)
  2. Govt. Compliance issues
  3. IT systems orientation
  4. Sexual harassment training
  5. Indirect costs of equipment, facilities and supplies
  6.  Individual counseling, coaching, mentoring

Cross training is a form of job enrichment, it leads to increased employee empowerment and security and can help to reduce very expensive employee turnover costs. It can thus increase productivity, morale and more. It can help fill voids created by illnesses and vacations and demonstrates to staff that the company cares about employees’ career growth. In short, effective and efficient cross training programs will serve you well.

4) Retaining Costs:

“Cash money isn’t the only way workers are compensated, of course – health insurance, retirement-account contributions, education and transit subsidies and other benefits all can be part of the package. But wages and salaries are the biggest (about 70%, according to the Bureau of Labor Statistics) and most visible component of employee compensation”.  Drew Desilver, Pew Research Center

Not every business can afford to offer a complete universe of benefits.  However, those companies competing most effectively for talent are offering benefits like the ones listed below to attract today’s entitlement savvy candidates. Where do you stand with respect to the following:

  1. Major Medical Insurance
  2. Disability coverage
  3. Dental insurance
  4. Vision care
  5. Life insurance
  6. Tuition reimbursements
  7. Pension/Profit sharing plans
  8. 401k Plans
  9. Flexible spending accounts
  10. Free transportation to and from work (see Google and Facebook)
  11.  Free company cafeteria open 24/7 (again, Google, etc.)
  12.  Child care services

According to Eric Koester of My High Tech Start-Up, “estimates range from 1.5x to 3x salary for the ‘fully baked’ cost of an employee – the cost including things like benefits, taxes, equipment, training, rent, etc.” Hiring a new employee isn’t a decision that should be taken lightly, as it doesn’t fall lightly on the company budget. But without workers, there isn’t much work done. And that’s the bottom line for businesses; even though the investment may make the company accountant cringe, the potential in return on a good new hire continues to make the investment worthwhile. 

Before you decide to add benefits, remember they are all added on top of the more mundane, but required (California) basics of:

  1. Social security tax of 6.2% on the first $117,000 in calendar gross earnings.
  2. Medicare tax of 1.45% on all calendar gross earnings (no maximum earnings)
  3. 0.8% Federal unemployment tax (FUTA) on the first $7,000.00 in calendar gross earnings.
  4. For CA employers State Unemployment Tax (SUTA) of up to a maximum of 6.2% on the first $7,000.00 in calendar gross earnings (new employers start at 3.2% SUTA rate on the first $7,000.00 in calendar gross earnings.
    (2016 statistics thanks to Craig Koster, CPA)

In the current economy where jobs are being eliminated by automation in record numbers it is increasingly important that hiring decisions be made wisely and as infrequently as your retention rate allows. I hope this article has helped to give some clarity and focus to your hiring processes.

Robert Skidmore, President

This entry was posted in Hot BizKitz and tagged , , , , , , . Bookmark the permalink.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.