How much does an employee cost and how can the business plan for this with current employees and making new hires? Finance and fintech journalist Neil Martin outlines the costs business owners should track and how to benchmark overall employee cost.
So, you've come to that point when you need to employ the next person. It might be that you are expanding your business, needing to get some part of it running better, or you just need some help out there to cut down the workload.
But how much does an employee cost for your business? Working out your employee cost is vital to business success, especially if you’re running an SME with a tight budget.
Calculating employee cost
When calculating employee cost, you’ll quickly realise that there's a whole heap of things you need to consider if you are looking for a meaningful cost estimate, including:
Take a yearly salary. Visible and easy to calculate – it’s divided by 12 to give you a monthly figure. Same with weekly wages and hourly rates, just divide the amount by the appropriate frequency and you get the headline rate. That's the easy part – next comes some less visible bits.
The first biggie is that the company has to pay National Insurance (NI) contributions for each employee. Both the employer and employee have to pay National Insurance.
The amount of Employer's National Insurance Contributions are dependent on a number of factors, not least the age of your employee and how much they will earn. For example, if they are over 21 (or over 25 for an apprentice) and they earn more than £169.01 per week, then you will be liable to pay 13.8% of their earnings in NI contributions.
After NI comes Workplace Pension Employer's Contributions. The provision of a pension is a statutory requirement for all eligible workers and they need to be signed up with the scheme within a timeframe of three months from joining your company.
Employees can of course opt out, but the employee needs to make that decision for themselves and tell their employers.
The key word here is eligibility. You might need advice on who constitutes an eligible employee. By the way, as an aside, if you do take professional advice – and it’s often a good idea to go down that route for total peace-of-mind – you also need to factor that cost into your overall cost-per-employee.
The cost of an employee in the UK
Salaries, National Insurance, and pensions are the big statutory requirements; now come the other costs you need to consider. Also, don't forget that we are talking about the cost of an employee in the UK. If you employ people in other countries, there are different tax regimes and social payments systems to consider.
In many other countries, people are very fond of quoting employee cost formulas. In the US, for example, they reckon you should allow for 1.4 times of an employee’s salary in order to work out the true cost of employing someone. You have to ask yourself with such formulas: do they consider other overheads and intangible elements? This could include equipment for work and benefits (such as subsidised travel costs, or gym membership).
The person you are employing will need the equipment to do the job. That might mean a new desk, chair, and computer. Each new person will need resources and all that increases your overheads. Those costs should all be factored in too.
What about all that time when someone might not actually be working? You have statutory holiday, public holidays, sickness absences, and maternity/paternity leave. Then there’s training – that comes out of the company’s bank account as well, especially if employees have to be away for a training day.
You might also want to factor in duvet days, socialising in the office, checking out YouTube videos on the company computer… okay, you don’t want to be pedantic here, but we’ve all done it – nobody works flat out from start time to finish time. You could add some costs per employee to your calculations to create a downtime percentage, as this keeps things realistic.
Employee costs as a percentage of turnover
It is very important that you consider all of the employee costs that will be incurred. One sound way to look at it is to ask yourself the question: what are my employee costs as a percentage of my business turnover?
It is hard work to generate sales and you need to keep your turnover percentage as low as possible, while at the same incentivising your employees and providing them a constructive and rewarding work environment.
Importantly, it’s not only the cost of employing someone you should consider, but what you are looking for from that person. Each person you employ will have an impact upon your bottom line and people, as well as equipment, are expensive overheads.
Also, things vary with industry and job role. An admin person’s cost would not be seen in the same way as say a salesperson. An admin person has a number of set tasks, a predetermined role. A salesperson is often given a harsher ‘break-even’ formula because that person is there to drive sales. So, they will have targets to break-even and then generate profit.
Learn more: How much is HR admin costing your business?
Calculating the cost of an employee
A good rule of thumb is to say, in reality, whatever you pay a person as a headline factor, it will cost you 1.5 to 1.75 times that amount to have that person in-situ, and that doesn’t account for targets and objectives that will link with your business plan.
Suffice to say, do the sums properly and you can ensure that that new person is not going to drain precious resources. Don’t do the sums and you could be in for a shock further down the road.
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Written by Neil Martin
Neil Martin is a freelance journalist and content writer on fintech and the wider financial sector. He is a Partner at The Old School Content Partnership and is also a keen road cyclist.