Is the true cost of hiring an employee even more than their salary?

Historically, calculating the true cost of hiring an employee has been tricky to work out

The Centre for Economics and Business Research (CEBR) and the UK’s Federation of Small Business, has published a new report to try and solve this ongoing issue. Actual cost is always an interesting figure, but even more so is the economies of scale that apply to employment: the first employee is the most expensive, then it gets cheaper and cheaper the more you hire.

The index calculates that on average, 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.

For a company’s first-hire, approximately 20 per cent of the total employment costs goes to national insurance contributions (the UK equivalent to Social Security) and income tax. Additionally, the cost of admin time is estimated to be 2.3 per cent of total costs, paid out of his own salary. The smaller the company, the higher the share of non-wage costs relative to total employment costs.

However, for the 20+ size business, a greater proportion of total employment costs goes towards the employees’ wages instead of the overheads. So really, companies get more efficient with size.

So how does this have a knock-on effect?

Forbes reviewed the following scenario:

A typical small business will pay an employee around £21,800, based on typical wage rates for a professional or skilled worker. Add to this, 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 lengthy.

The authors of the report want these ‘extras’ to be addressed in particular, as 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.

In a nutshell? The smaller the business, the higher the opportunity cost for an employer to comply with all of the regulations and administrative burdens.

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?”


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